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Exploding Fiscal Deficits in The United States

Andrew Stoeckel and Warwick J. McKibbin

Introduction

In just two and a half years there has been a massive turnaround in the projected United States fiscal position. The ten year cumulative deficit has worsened by US$7 trillion. Part of the deterioration is due to a weak economy, but more is due to policy changes.

Although the turnaround has given a short term stimulus to the economy, the medium to long term effects are negative for US real investment and growth. Just as was experienced during the Reagan deficits of the early 1980s, this will unfold as higher real interest rates and an initially strong US dollar. Nominal US long bond yields could be 60 basis points over what they might otherwise have been had the policy induced deterioration in the fiscal deficit not occurred.

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