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Publication

America’s Next Famous Dinner Party?

The recent spectacle of the two major political parties in the United States being unable to agree on any action that would close the gaping federal fiscal deficit, more than 9 percent of GNP, is both unedifying and bewildering. In past decades, similarly tense political disputes over actual or projected fiscal deficits, if left unresolved, have induced sharp increases in interest rates that have focused the minds of the politicians worried about a credit crunch. But now with the Fed keeping short-term interest rates close to zero, and central banks in emerging markets and the Fed itself buying huge amounts of longer term U.S. Treasury bonds, interest rates have not risen. This crucial source of market discipline on fiscal behavior has been euthanized.

Author(s)
Ronald McKinnon
Publication Date
August, 2011