June 4, 2009

Interest rates could haunt world economies

Rising interest rates on rising debt could haunt the United States much like the crisis that sneaked up on U.S. homeowners, a Harvard University economist said.

Interest payments on federal borrowing could reach $806 billion by 2019, up from $170 billion this year, The New York Times reported Thursday.

With borrowing escalating to get world economies back on track, a one percentage point increase in interest rates could increase U.S. obligations by $50 billion a year, the newspaper said.

It's a gigantic issue, said Harvard professor Kenneth Rogoff. It leaves us very vulnerable to a global rise in interest rates that might be substantially beyond our control.

It's a little like what happened to the subprime borrowers. People are just assuming the funding will always be there, Rogoff said.

Government borrowing in other countries has also alarmed economists. Britain's debt could reach 100 percent of its gross domestic product by 2013, Standard & Poor's said.

As borrowing affects bond rates, which in turn affect rates consumers pay, it will be more expensive for everybody, said Olivier Blanchard, chief economist of the International Monetary Fund.

As government borrowing in the world increases, interest rates will go up. We're already starting to see it.