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Deficit Problem Bigger Than Reported
-- December 11, 2002
The ever-growing federal deficit will weigh on interest rates even more than investors realize. That's because the deficit is already even BIGGER than what the government reports. The government is projecting a deficit of more than $200 billion in fiscal 2003. But if you strip out all of the smoke and mirrors and look at what the government actually owes, the government is running a deficit at the annual rate of more than $940 billion -- and that's according to the Federal Reserve's own numbers. If the U.S. needs to pay for a war or implements tax cuts to try to stimulate the economy, the deficit will grow even more!
Result: The government will likely flood the bond market with more long-term bonds -- and will need to increase interest rates in order to bring in investors. That's bad news if you're hanging onto long-term bonds right now. When reams of long-term bonds are dumped on the market in the months ahead, prices will plunge.
article: As Deficits Climb, Some Investors Fear Rates Will Follow (free registration required)