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Interest rate takeoff promises rough ride

It's almost as sure a bet as the sun coming up tomorrow morning--interest rates will continue to trend up. Given our outsized deficits and egregious national debt, investing in T-bills just gets riskier for buyers who will demand a higher return. And higher interest rates mean servicing our humongous...

By Jonathan D. Miller | Updated on June 15, 2009

It's almost as sure a bet as the sun coming up tomorrow morning–interest rates will continue to trend up. Given our outsized deficits and egregious national debt, investing in T-bills just gets riskier for buyers who will demand a higher return. And higher interest rates mean servicing our humongous deficits will become even more costly for taxpayers, credit will become more expensive for investors, and the chances for robust recovery will be compromised.

But should we be surprised? Can the Fed sustain rates much longer at levels so far below the historic mean without eventually ramping up inflation. At some point the cheap credit era had to end and unfortunately the crash was just step one. Rates have only been kept artificially low by pumping dollars into the money supply to forestall greater economic catastrophe. As the economy stabilizes we'll need to get off that medicine quickly or inflation infection sets in. And long-term rates have already begun to take off. Welcome to step two–a reversion to the mean.

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