The global economy cannot afford higher US interest rates

Article Highlights

  • The back-up in US long-term interest rates (1.6% to 2.9%) is damping the US housing and durable goods markets.

    Tweet This

  • We see the damage that higher US interest rates have wrought on the emerging market economies.

    Tweet This

  • Rising long-term US interest rates would risk reigniting the euro crisis by raising questions about debt sustainability.

    Tweet This

Sir, David Rosenberg’s bold call that we are at the start of a secular bear market for US long-term bonds would seem to be questionable for both domestic and more importantly for international reasons (“Don’t bet against Bernanke’s quest for higher inflation”, Insight, September 10).

The back-up in US long-term interest rates from 1.6 per cent in May to about 2.9 per cent at present already seems to be damping the US housing and durable goods markets, which have been primary contributors to the still feeble US economic recovery. One would think that a further significant back-up in US long-term interest rates would run the real risk of preventing the US economy from recovering at a pace that would reduce the large gaps that still characterize the labor market. That in turn would keep US inflation well below the Federal Reserve’s desired rate.

At an international level, we have already seen the severe damage that higher US long-term interest rates have wrought on the emerging market economies, the main source to date of global economic growth, as capital has been repatriated from those countries to the US. Major emerging market economies including Brazil, India, Indonesia, South Africa, and Turkey are all now in the grips of acute currency weakening that would only intensify were we to get further increases in US long-term interest rates.

Rising long-term US interest rates would also risk reigniting the euro crisis by again raising questions about debt sustainability. This would seem to be particularly the case when one considers that countries such as Ireland, Italy and Portugal all have public debt to gross domestic product ratios in excess of 125 per cent that can only reasonably be reduced in the context of lower interest rates.

One has to hope that, in setting the pace of tapering, the Federal Reserve does not make the same mistake Mr Rosenberg makes of overlooking the impact of higher US interest rates on the rest of the global economy and of treating the US economy as if it were an island disconnected from the rest of the world economy.

Desmond Lachman, American Enterprise Institute, Washington, DC, US

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Desmond
Lachman
  • Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
  • Phone: 202-862-5844
    Email: dlachman@aei.org
  • Assistant Info

    Name: Emma Bennett
    Phone: 202.862.5862
    Email: emma.bennett@aei.org

What's new on AEI

image Recovering from tax time blues
image 10 welfare reform lessons
image Let HHS nominee Sylvia Burwell explain Obamacare lie
image Why bold ideas backfire in politics
AEI on Facebook
Events Calendar
  • 14
    MON
  • 15
    TUE
  • 16
    WED
  • 17
    THU
  • 18
    FRI
Wednesday, April 16, 2014 | 10:00 a.m. – 11:00 a.m.
Calling treason by its name: A conversation with Liam Fox

Join us at AEI as the Right Honorable Liam Fox sits down with Marc Thiessen to discuss and debate whether America’s intelligence agencies have infringed on the personal privacy of US citizens.

Event Registration is Closed
Thursday, April 17, 2014 | 4:00 p.m. – 5:00 p.m.
The curmudgeon's guide to getting ahead

How can young people succeed in workplaces dominated by curmudgeons who are judging their every move? At this AEI book event, bestselling author and social scientist Charles Murray will offer indispensable advice for navigating the workplace, getting ahead, and living a fulfilling life.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.