Re: Obama’s Budget and Interest Rates

To address Andy’s question about what assumptions the President’s budget makes for interest rates, it doesn’t assume interest rates will stay at the absurdly low level (under 2 percent for a 10-year Treasury note) for the next ten years and does expect rates will basically return to historical norms. The assumptions underlying the technical analysis are here. It has 10-year rates going back up to 5 percent by 2018. (Similar assumptions underlie the CBO’s baseline budgeting.)

That said, their economic assumptions may be somewhat rosy, but the interest assumptions may be too. Of course, it is possible that interest rates don’t rise, which could be tens of billions in annual savings from the baseline assumptions — but, more likely, as U.S. debt spills over the 100 percent of GDP mark, we could see rates higher than projected, and higher than historic averages. Given the 400 something billion dollars we’re going to spend on interest next year, that could be catastrophic.