Crawford, Peter
November 1981
Challenge (05775132);Nov/Dec81, Vol. 24 Issue 5, p49
Academic Journal
During the 1950s, 1960s, and l970s, interest rates tended to move inversely to movements in the federal deficit. In other words, rates fell as deficits rose. This was largely due to the fact that a weak economy put a damper on federal revenues, hence, deficits burgeoned at the same time that private credit demand sagged. Rates plummeted in 1975, for example, when federal borrowing accounted for twice the share of total funds raised in the credit markets that it does in 1981. Some increases in real rates due to increased borrowing by the government might readily discourage an equivalent volume of consumer and business borrowing because these private borrowers are highly sensitive to even small rate changes. More important, a change in the federal deficit of some $20 to $40 billion is likely to have a comparatively small effect in a country in which the annual net volume of funds raised in the credit markets has run on the order of $500 billion in recent years. In any event, there is little reason to think that the markets' expectations about the 1981-82 deficits have shifted by more than $15 billion at most in the past year.


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