US economic policy makers - and, therefore, the rest of us - are in trouble. The sudden and extraordinary deterioration in the US government's finances has caught them off guard. The borrowing needs of the government now threaten to drive up the cost of borrowing, not only for the government, but for everyone else in the world as well.
In fact, interest rates have already risen, by 135 basis points over the last six weeks. This is a very serious concern because higher interest rates, if they persist, will choke off the refinancing boom in the United States that has fuelled consumption there for the last three years.
If consumption declines,...
