If too much debt is a problem, it stands to reason that the best cure is more debt. Like curing a headache with a hammer, or alcoholism with a bottle of Wild Turkey, more debt will apparently enable the Fed to fix the economy once and for all. So suggests Federal Reserve Bank of Minneapolis President Narayana Kocherlakota.
In remarks prepared for a conference hosted by Germany’s Bundesbank, Kocherlakota maintains that increasing the nation’s borrowings “would push downward on debt prices, and so upward on the long-run neutral real interest rate.”
Raising the neutral rate would supposedly give the Fed more room to lower rates should the economy tank again (which it is arguable already doing.) In other words, higher interest rates would make it easier to further inflate those bubbles that have already been re-inflated. Brilliant!
Perhaps Mr Kocherlakota is suffering from jet lag, or ingested some bad kraut. Because, at $18.15 trillion in national debt, every 1% increase in rates amounts to another $181.5 billion in annual interest payments — over 5% of the US annual budget.
A return to a historically average 6% would boost interest payments to over 20% of annual expenses — competing with social security and healthcare for the nation’s biggest expense category. Is there anyone out there who honestly believes spending more tax dollars on interest payments would help the disappearing middle class?
And, every time some Fed president or PhD economist comes up with a bone-headed idea like this, they’ll have to toddle across the street and toss a nickel in that jar.
I’ll bet it’s filled up in no time. It’ll pay off our national debt and end the financial crisis once and for all. Maybe Kocherlakota will run it by his pals in Frankfurt. Bet they could use a great big jar, too.