BERKELEY – For countries where nominal interest rates are at or near zero, fiscal stimulus should be a no-brainer. As long as the interest rate at which a government borrows is less than the sum of inflation, labor-force growth, and labor-productivity growth, the amortization cost of extra liabilities will be negative. Meanwhile, the upside of extra spending could be significant.
Using quick and dirty search methods we get, productivity growth from the IMF:
Coming in at zero. Then population growth is .75% according to World Bank. And inflation is basically zero. But Congress borrows at the ten year rate, they got a huge rollover problem and have long termed all their debt. The ten year rate is 1.83%.
Borrowing costs are too high, and we see that in the erratic volatility of interest payments by Congress,they suffer huge rate risk.
Discussion:
Rates: When Congress borrows short term, and gets growth!, then the curve is upward rising and lifts. But rollover of the past due occurs about 3 trillion per year, and its all 5-20 year debt. The total effective rate becomes the weighted peak of the term distribution of debt, and that measures to the ten year rate.
Inflation: We have deflation in consumer goods (68% of GDP), less housing and medical. But housing inflation is driven by Asian rebalance and may not be all new construction after revisions. Medical inflation is driven by Obamacare.
Productivity: It ranges from 0 to 1.5% depending on your source.
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