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What Should Interest Rates Really Be?

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    JD Foster of the Heritage Foundation weighs in on the budget deficit and interest rates.

  • Duration 3:02
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-- -- just aren't some more -- settling a sixteen trillion dollars hard member Ted digest rapper had a -- that's just where our national debt is headed the US.

Is still posting as a safe haven investment but how Long Will that last joining us now with.

JD Foster senior fellow at The Heritage Foundation -- former white house office of management budget official.

-- -- more concerned tell us what I'm trying to get from you is there's not really clear message from the markets right now is there about.

The exorbitant amount of national debt.

Well we have a complete conflicting forces we have a massive amount of debt that we have accumulated recently 3.2 trillion dollars so far under President Obama.

And normally would expect that push up interest rates right at any -- swapped.

Not it's not it's it's being swapped that affected being swamped by the fact that international capital is flowing to a safe haven like United States the UK Germany.

Driving down interest rates so the capital inflows is swapping the effect you would normally expect from a rapid rise in national debt.

So quickly -- what should real interest rates -- -- US.

If you T yeah my clients.

Right you know -- might think it today without the debt we would be in the three to 4% range maybe a little bit higher on a ten year treasury.

And an add another percentage point for all the -- that we've accumulated -- -- the academic research kinda suggests about an additional hundred basis points on top of a three or four.

The Fed as you know we see that ten year treasury in the one point 521 point 7%.

Range that suggesting the effect of all -- international capital flowing again.

So you think there's anything that would make that relationship go back to what you would normally expected to be you're as long as we continue to be -- safe haven we don't have to worry about these interest rates and.

Well -- as we are the safe haven and there's a great concern and and capital markets especially about Europe also -- China.

Then the world see interest rates -- -- relatively low at some point this capital that has flown and which is a temporary phenomenon is gonna -- out -- -- maybe 123 years or maybe next month.

Where it begins to -- a lot of get a which -- we'll see a very rapid rise.

And interest rates normally plus the effect of all this debt on interest rates so you we we may see a very rapid rise in rates once -- finally starts from.

So what is your outlook for interest rates here through the election do you think we will see that capital cat catalyst sorry.

-- -- sharp rise or do you think that we're just can't get it's right it's been years right JD that we see knees and these seven you can lady interest rates -- that's debatable I guess at these historic lows so that's for -- Yeah how well one thing you can do is know the direction of the change and it is going to be large one thing you can't know is the psychology of the investors.

Who will are gonna have to change -- predicting it is impossible could be next month could be two years from now.

We do know it's not a long term phenomenon is not a medium term it is short term.

At some point capital start is gonna start flowing out seeking higher returns elsewhere.

And then that's when our interest rates are gonna start to rise rapidly.

Okay JD faster thanks.

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