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The U.S. Federal government has been running deficits in the hundreds of billions of dollars
which means that the U.S. Treasury is issuing hundreds of billions of dollars in new Treasury
securities. If this is all you consider, what are the consequences for interest rates, spending
financed by private borrowing, the money supply, the bond supply and inflation from this action
alone? While the U.S. has been running these massive deficits, what has been true about interest
rates? How do you explain this contradiction in interest rate effects and what are the big concerns
going forward?
Solution
Inflation is something the government wanted from years, The developed world really did not
have inflation for a very long period. Federal reserve actions are basically to make economy get
back on track and generate some growth. According to IMF below 2% growth rate is nothing but
Recession.
Intrest rates are kept low in US for a very long time, Many were asking them to raise intrest rates
to actually make economy meanigful, Intrest raise lowering or rising did not impact lending that
much as banks were unwilling to lend anyway, Government did enjoy borrowing and spending
on massive stimulus package that created jobs.
Fed has already announced that it would raise intrest rates going forward, that means we can see
raise in intrest rates in future which will bring money back to United states. If intrest rates are
higher it will promote savings and reinvestment
Intrest rate rise will also hamper further investment in the economy as most european lenders
usually offer loans at near zero intrest rates.
This will all end in future and we will see a new system emerge for the economies all around
developed world,

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The U.S. Federal government has been running deficits in the hundred.pdf

  • 1. The U.S. Federal government has been running deficits in the hundreds of billions of dollars which means that the U.S. Treasury is issuing hundreds of billions of dollars in new Treasury securities. If this is all you consider, what are the consequences for interest rates, spending financed by private borrowing, the money supply, the bond supply and inflation from this action alone? While the U.S. has been running these massive deficits, what has been true about interest rates? How do you explain this contradiction in interest rate effects and what are the big concerns going forward? Solution Inflation is something the government wanted from years, The developed world really did not have inflation for a very long period. Federal reserve actions are basically to make economy get back on track and generate some growth. According to IMF below 2% growth rate is nothing but Recession. Intrest rates are kept low in US for a very long time, Many were asking them to raise intrest rates to actually make economy meanigful, Intrest raise lowering or rising did not impact lending that much as banks were unwilling to lend anyway, Government did enjoy borrowing and spending on massive stimulus package that created jobs. Fed has already announced that it would raise intrest rates going forward, that means we can see raise in intrest rates in future which will bring money back to United states. If intrest rates are higher it will promote savings and reinvestment Intrest rate rise will also hamper further investment in the economy as most european lenders usually offer loans at near zero intrest rates. This will all end in future and we will see a new system emerge for the economies all around developed world,