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The dollar value of debt is meaningless without accounting for interest rates. When interest rates rise, the dollar value of debt can be reduced by trading low
by astazangasta 7y ago
The dollar value of debt is meaningless without accounting for interest rates. When interest rates rise, the dollar value of debt can be reduced by trading low interest debt for high interest debt.
- defterGoose 7y agoThis sounds like economic witchcraft, can you explain a little further?
- SamReidHughes 7y agoA bond paying 2% that matures in 10 years is worth less than a bond paying 4% that matures in 10 years. So you can buy back low interest long term bonds for cheaper.
- salawat 7y agoSo... What happens when you run out of people willing to hand you money until you actually pay them back? What you describe assumes someone is always willing to take the gamble on will you make good. That's one hell of an assumption.
- astazangasta 7y agoWell, so far people continue to borrow from all major governments no matter how indebted. Also, your bond is legal tender guaranteed by the US Treasury (or some other sovereign treasury), so you can always sell it to someone else. No one is stuck waiting for their bond to mature. Finally, and most critically, the Treasury pays back the bond in dollars when it matures. The treasury can also create dollars. Thus, the Treasury will never be unable to pay back a bond.
- defterGoose 7y agoOk, but when they print unlimited amounts of money I'm not exactly getting the return on value that I expected because of inflation.
- astazangasta 7y agoInflation is pretty low right now. Just printing money does not produce inflation - if it did we would have seen massive inflation during Quantitative Easing, when the Fed put trillions into the economy. In fact there was almost none. This is because inflation is governed by the equation of exchange, MV = PQ. M is the supply of money, V is its velocity (how fast it is being spent), P is prices and Q is aggregate demand. If M goes up, P only goes up if Q and V are constant. In an economy like ours where the productive capacity is much greater than demand, M can rise without much effect on P. In general the government can continue printing money at the rate that productivity growth supports. Since this is related to the amount of borrowing, debt probably isn't going to cause inflation.
- Fjolsvith 7y agoExactly. The money you lost out on goes to the owners of the central banks.