Mortgage rates stayed sub-5.5 percent all week long; at their lowest, almost reaching the 5.25 percent half-century record set in June of ’03.

February retail sales came in on the soggy side, flat for the month, ex-autos; and the University of Michigan consumer confidence numbers failed to recoup the January plunge. The stock market this week lost all of its 2004 gains, which helped interest rates to stay low, but the decline is thus far no more than a modest retracement of a yearlong, straight-line gain.

The bombing in Spain affected financial markets only at Thursday’s close, and only at the suggestion that the work was al Quaeda’s, not that of Basque separatists. I suspect that the markets are adjusting to a now-permanent threat of terrorism. The acts themselves are economic pinpricks (so long as non-nuclear), and the only real economic damage is self-inflicted by various forms of panic. Fear reduces tolerance for risk-taking of all kinds, and induces the financial and societal corrosion from a fortress-state mentality – barriers, inspections, suspicions and brassarded bureaucrats, in numbers and places often disproportionate to actual threat.

I hope and believe that the markets are right that we will gradually get more used to the random threat.

The economy is still cruising at a 4 percent-something GDP pace. It is not accelerating, but there is no sign of deceleration, either. Greenspan assured us again today that “In all likelihood, employment will begin to increase more quickly before long…,” but neither he nor other expansionists want to talk about the quality of the jobs ahead, their wage scale or the prospects for replacing lost high-paying jobs.

Still, absent some financial oops-a-daisy in a fast-grower like China, or ossified non-grower like Europe, or authentic crisis in dollar exchange, the economy ought to continue to cruise ahead, gradually working off the capacity excess, and then take interest rates higher.

Save one development: sometime in the next 12 months, the country will learn its true financial condition. Whether from admission by the current president, or forced by Congress, or revealed by a new president, the shock moment is coming.

The reckoning will be obscured by public-finance fairy tales: that we should balance our budget, or that government borrowing “robs from future generations,” or that we can grow our way out of this shortage of tax revenue and excess of benefits. When you hear any of these lines, dismiss both the concept and the speaker.

Running a deficit of 2 percent of GDP is good business; I am not robbed when my taxes are used to pay interest on my share of the rolled-over debt with which World War II was won; and my generation’s debt, and the next, and the next will be rolled over so long as the nation shall last. Good business – so long as the debt does not for long grow faster than the economy.

The reckoning: we are going to run a $500 billion deficit next year, plus the cost of military operations in Iraq and Afghanistan (which the Bushies refuse to estimate!), and the further cost of subsidizing Iraq (if you think last year’s $87 billion was the last of that, dream on); plus the $200 billion in taxes collected to pay future Social Security benefits. Figure $75 billion minimum for the Iraq/Afghan combo, and you’ve got a real deficit of $775 billion, at least 7 percent of GDP.

The last time we got in real budget trouble, in the early ’80s, it took 10 years and three big tax increases to resolve. However, at its worst, the ’80s deficit never got bigger than 5 percent of output, and the Boomers were entering their most productive years, not retirement.

The hunch here: a budget reckoning is going to tend to slow the economy, protract the absorption of excess capacity and lengthen this interval of low rates.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at


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