Federal budget deficit sparks worries

In a worst-case scenario, foreigners who finance the U.S. budget and trade deficits would sour on U.S. investments and unload their holdings. The prices of U.S. stocks and bonds could plunge. Interest rates, including those for mortgages, could soar. A financial crisis could confront the country.

Economists are troubled by the prospects of budget deficits as far as the eye can see and want to see them trimmed. But the size of the current budget deficits, while unwelcome, do not signal that a crisis is imminent, they said.

An important barometer is the size of the federal debt — now about $8 trillion — relative to the overall economy, as measured by gross domestic product. Under that measure, this debt accounts for around 63.2 percent of GDP, Bethune said.

‘Low investment is bad’
“Generally speaking, when it is over 75 percent of GDP, then the yellow flag goes out. I would say 95 percent of GDP and over is definitely a red flag,” Bethune said.

The government produces a budget deficit when its total spending exceeds its total revenues. Budget deficits cause the government to borrow more money by selling Treasury securities to domestic and foreign investors. That additional borrowing increases the government’s debt.

Despite the recent string of large budget deficits, long-term interest rates in the U.S. have behaved well. In fact, relatively low long-term rates around the world have puzzled economists and spawned a number of theories. Some experts believe too little investment worldwide may be behind this; others believe too much savings is the reason.

From an economic point of view, there is more concern about higher borrowing costs over time crimping business investment and ultimately the production of goods and services, economists said.

“Low investment is bad. That’s going to mean lower productivity and lower production in the future, which has a cost on society,” said Erik Hurst, associate professor of economics at University of Chicago’s Graduate School of Business.

People who save would benefit, assuming inflation stayed under control. If the deficits fanned inflation, then the Fed would need to boost interest rates, pushing a whole range of borrowing costs even higher.

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