Recessions caused by financial crises have a history of being long, deep and difficult to fully escape. The current crisis was caused in large part by too much borrowing and too much lending. And the adjustment process of that will be difficult.
While The U.S. government has stepped in as lender and spender of last resort, but its deep pockets are not bottomless. Waning political and investor appetite for taking on more debt could stand in the way of any additional big spending plans.
Higher borrowing costs are an inescapable feature of the post-recovery world as public deficits and spending grow.
Economists are increasingly worried about the US Treasury's ability to fund costly economic rescue measures that are expected to drive this year's budget deficit to $1.75 trillion.
The U.S. will likely sell $3.25 trillion of Treasuries in the fiscal year ending Sept. 30 to fund bank bailouts, stimulus spending and a record budget deficit. Already, huge government debt issuance is raising questions about long-term U.S. fiscal stability. Speculations grew recently that the country could be stripped of its top-tier AAA credit rating after Standard & Poor's said it was considering downgrading Britain’s sovereign rating. Thus, recently the U.S. Treasury yield curve moved to its steepest level on record, the spread between 10- and two-year note yields gapping to 275 basis points, reflecting concerns of higher interest rate trend.
Indeed, investors are worried about the appetite for Treasuries weakening, since so much of this economic turnaround is riding on the government's continuing ability to spend. The fear is that higher yields could snuff out the stock market rally by making it more expensive for the government to borrow, as well as for consumers, whose mortgage rates are pegged to the 10-year Treasury. Also, higher yields could be foreshadowing a troublesome spike in inflation.
Some economists think the yield on 10-year U.S. government bond may reach 6 percent by 2011, compared with 3.6 percent now. Because so many other loans are based on that rate, that could make it costlier to buy a house or expand a business.
Moreover, some believe the U.S. economy appears destined for several years of weak growth and high unemployment that leave it vulnerable to a recession relapse after the massive dose of government stimulus wears off. Coupled with high inflation, we might end up in a stagflation trap.
They think the U.S. economy may trudge along at a sluggish growth rate somewhere in the range of 0.5 percent to 1.5 percent while banks recover from the credit crisis, which could take another three years. Oil has nearly doubled since the start of the year reaching $60 per barrel recently and futures prices suggest it will edge higher at least through the peak summer driving season.
If the forecast proves accurate, it would leave the economy susceptible to a shock, such as a big jump in oil prices, and could force the United States to issue even more debt than investors expect. That would likely increase borrowing costs, both for the government and the private sector. US interest rates usually lead the world’s interest rates. In particular, Thai interest rates are very much influenced by interest-rate movement in the US. Therefore, we can expect a higher interest-rate environment in the coming years.
By Chodechai Suwanaporn [email protected]
Source: www.fpo.go.th