A tidal wave of deficit spending by the U.S. government is already increasing the costs of borrowing, retarding economic recovery, and confirming again a key contention made repeatedly by critics of Keynesian-style stimulus plans: That government spending, on net, does not add to the economy. The more government borrows to finance its spending, the less capital is available to be invested in the private economy.

Last week, the Financial Times reported that since the end of December, the yield on the benchmark 10-year Treasury note has risen from just over 2 percent to 2.95 percent, and as a result mortgage rates are being pushed higher.

The Congressional Budget Office projects the 2009 federal budget deficit to reach $1.2 trillion. That budget gap amounts to 8.3 percent of gross domestic product, which shatters the previous post-World War II high of 6.0 percent reached in 1983. The 2008 deficit was “merely” $455 billion. The surge in debt reflects the anticipated costs of continuing to bail out banks through the Troubled Asset Relief Program and the government assumption of Fannie Mae and Freddie Mac’s obligations. But the CBO’s projections do not account for the fiscal impact of the stimulus plan that Congress is now debating. That plan would add $800 billion or so to the deficit over a two-year time period.

The prospect of even higher levels of deficits to come has some world leaders questioning U.S. economic policies. At the World Economic Forum in Davos, former Mexican President Ernesto Zedillo told the New York Times: “The U.S. needs to show some proof they have a plan to get out of the fiscal problem. We, as developing countries, need to know we won’t be crowded out of the capital markets, which is already happening.”

The interest rate for an average conforming mortgage now stands at 5.33 percent. J. D. Foster of The Heritage Foundation projects that new deficit spending will push that rate up by a percentage point or more by the end of 2010. Making it harder for people to finance new homes seems exactly the opposite of what our political leaders claim they want to do.