Higher Interest Rates

We know that interest rates are going to go up eventually. But no-one wants the cost of borrowing to go up right now - least of all the world's overextended governments. That's why the ructions in the US government bond market this week has people nervous.......

But the second lesson is more fundamental: we all have higher interest rates in our future. And when I say higher, I don't just mean higher than the record lows they are at today, I mean higher than they were before the crunch. An era of cheap money partly got us into this mess. Thanks to the mountain of public debt now sitting on government balance sheets, it's a fair bet that money is going to more expensive when we come out the other side....

The financial crisis has generated a "scrambling for public funds of war-like proportions". Other things equal, basic economic theory suggests that a rise in government borrowing on that scale will push up the long-term cost of borrowing once the recovery gets going. Of course, that might not happen overnight, especially with so much slack in the big economies due to the recession. But even sceptics about the effect of borrowing on rates would probably accept that this kind of rise in government debt will have an effect on the cost of debt....

When the advanced economies pull out of this crisis, the level of public debt is going to be the central fact of economic and political life for years to come.

Stephanie Flanders at BBC.