Higher Interest Rates Thanks to Dubya

Clinton brought about economic expansion due to creating a budget surplus, which also resulted in lower interests rates (and more money in the pockets of home buyers, among others). George Bush's policies do the opposite. The Kiplinger Letter today predicts further increases in interest rates:

 A new era of higher long-term interest rates is dawning.

A year from now, 10-year Treasuries will be up at least a point

as the economy continues to grow and inflation picks up steam. But...

       It's the reemergence of a budget deficit "premium" on rates

that will pack the real punch. A growing realization that Uncle Sam

will be a big borrower for years will once again push rates higher.

There's little chance that President Bush can cut spending much,

especially as costs mount in Iraq. Moreover, White House proposals

to lock in tax cuts and establish private Social Security accounts

further cloud the outlook for a return to balanced budgets.



       Plus there’s likely to be less help from foreign investors.

In recent years, long-term U.S. interest rates have been moderated

by big purchases of Treasuries by China, Japan and other countries.

But as China gradually eases the fixed exchange rate for its yuan,

its dollar reserves will dwindle, curbing the need to buy Treasuries.

Similarly, Japan will cut back as the U.S. dollar continues to soften

and as its own economy begins to show more muscle next year.



       The bottom line: Rates padded by one to two percentage points

over the next several years, dampening economic growth a bit.