The same driving forces have propelled every strong American economic recovery since World War II: a sustained rise in business investment and increases in new-home building. The resulting increases in the demand for credit have driven up interest rates. As the current recovery builds and extraordinarily low interest rates normalize, the economy will begin to feel for the first time the effects of the unparalleled borrowing of the past decade. Exploding debt-servicing costs and the new federal borrowing could crowd out private borrowing at levels never before experienced in any of the 10 previous postwar recovers.
During the weak Obama recovery, business investment lagged behind the norm, and new-home construction remained at the recessionary level. Today business investment is at the highest level in a decade, and housing starts are up 42% from the average level of the Obama era. With the economy now growing at the average postwar rate of 3.5%, interest rates also should be expected to rise toward their postwar norms as government and the private sector compete for available credit.
Nominal interest rates in the postwar period were highly affected by inflation, which rose at an annual rate of 3.8% from 1948-2008. Interest rates surged when inflation approached double-digit levels from 1977-82, and Treasury borrowing costs reached their highest postwar levels, averaging 10.6%. If that six-year period is set aside as an anomaly, the Treasury’s average borrowing cost from 1948-2009 was 4.8%. For the entire 1948-2008 period, real Treasury borrowing costs—the nominal borrowing costs minus the inflation rate—were 1.2%.