Tax Foundation: Federal Debt Doesn't Raise Long Term Interest Rates
January 14, 2002
There is no evidence to support the frequently asserted link between federal debt and long-term interest rates, according to a memo by Tax Foundation chief economist John Barry being circulated by the Senate Finance Committee.
Barry charted the 10-year Treasury Constant Maturity Rate and publicly held federal debt as a percentage of gross domestic product (GDP) from 1953 through 2001.
- Overall, he found, there appears to be a negative correlation between 10-year interest rates and publicly held federal debt as a percentage of GDP -- meaning that interest rates actually fell when federal debt rose, and interest rates rose as federal debt fell.
- Over the last five years, Barry found no apparent correlation between publicly held debt and long-term interest rates.
- In fact, between 1998 and 2000, a period of substantial budget surpluses and publicly held debt reduction, long-term interest rates rose from 5.3 percent to 6.0 percent.
The relationships held when real (inflation-adjusted) interest rates are considered.
Source: "Analysis Indicates There Is No Connection Between Federal Debt And Long Term Interest Rates," White House Bulletin, January 11, 2002.
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