Why does a high budget deficit lower interest rates and howdoes that hurt the dollar?

Question

No partisan hack answers please.

Answer 1

It doesn't

Answer 2

Budget deficits are  financed by selling bonds to investors  so all  other things being equal  it increases the demand  for capital , and should raise interest rates not lower them. If the money  to finance the deficit comes from foreign countries the flow of capital into the nation will result in a trade deficit as the exchange rate adjust upward  to  balanced the inflow and outflow   so it should increase the value of the dollar. In the long run  this is not sustainable so the value of the dollar will fall as foreign investor  begin to view  us as a credit risk, which is what happened over the last year or so, and  the dollar is now down after decades of falling  private savings rates, increasing  government debt owned by foreigners,  and trade deficits.

Answer 3

Budget Deficits and Interest Rates have no correlation. Interest Rates are set by the Federal Reserve and they are adjusted based on the economy's growth and inflation.

Budget Deficits do impact the value of the US Dollar. Because the more debt we issue, the more tax revenue it takes to service that debt. And that means higher taxes on the country and a burden on business and consumers. Thus limiting GDP growth. Now if it got too high and looked like the US couldn't repay its debt and might default, then the US dollar would tank.. But've we've not reached thos trading levels yet.

But think about it.. If your credit rating was a currency and you ran up tons of debt that you had to repay from your salary, you can be certain your credit rating would drop in lock step as you ran up debt and didn't increase your salary.