Thursday, March 22, 2012

Partial Japanization of the US economy

BNP Paribas is making an important point in the latest research report about the dangers of low interest rates in the US. They argue that this regime allows policy makers to sweep under the rug the increased federal borrowing. Interest expenses being such a small portion of the GDP (see chart) allows the politicians to get away with it - for now.
BNP Paribas: ... low rates also reduce incentives to deal with the long-term fiscal gap and lull legislators into a false sense of security about the cost of their policies. It remains an open question as to whether US policy makers will be able to address the deteriorating fiscal outlook outside of a crisis.

...a partial Japanization of the US economy where nominal interest rates remain low and the government has little incentive to implement fiscal austerity remains a possible outcome for the US. 

Federal govt net interest payments as percent of GDP (Source: BNP Paribas)
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