6 ms·
From the article: "Interest rates, already one of the fastest rising costs in the federal budget, will rise as the political crisis builds, because foreign borr
by User23 7y ago
From the article: "Interest rates, already one of the fastest rising costs in the federal budget, will rise as the political crisis builds, because foreign borrowers will demand an additional risk premium."
Wrong. Interest rates will rise if the Federal Reserve raises interest rates. They will not if it does not. The Fed controls 100% of overnight rates and virtually all of the rest of the yield curve[1]: "as we went out on the curve the correlations remained very tight (FFR at 100%, 3 month at 97%, 1 year at 96%, 5 year at 91%, 10 year at 86%, 30 year at 87%). Even at the longest duration there is an 87% correlation between the movements of the Fed Funds Rate and the 30 year bond. In other words, the bond market is the Fed’s whipping boy. Not the other way around."
What the Fed does not control is the US dollar's foreign exchange rate. So it's entirely possible that debt ceiling worries will cause a weaker dollar. Paradoxically though, they might cause a stronger dollar since the government not issuing debt actually constrains the dollar supply. Sovereign finances are deeply weird, and global reserve currencies are too.
[1] https://www.pragcap.com/i-want-to-come-back-as-the-federal-reserve-you-can-intimidate-everybody/ https://www.pragcap.com/i-want-to-come-back-as-the-federal-r...
- ohiovr 7y agoMy theory is the fed isn't all powerful with interest rates. They have target rates they wish to achieve and one way is to buy and sell treasuries on the open market. Treasury prices are still up to the results of an auction process. But there is usually a secondary market you can buy from from treasuries that have already been awarded to someone. The debt itself is not fearful. Being unable to sell treasuries at low costs will be a big change. The fear is that todays political climate could indeed be too messed up to act in time so that congress has the authority to spend. Missed payments are going to be a problem if it happens. But I'm not a finance expert.
- dfrage 7y agoYour theory proved correct in the 1970s, things got so messed up "everything" rose, both unemployment and inflation driving a stake into the heart of the Phillips Curve, and what people demanded to buy private or Federal debt. The latter got so bad "Carter bonds" were created, denominated in West German Marks or Swiss Francs: https://en.wikipedia.org/wiki/Carter_bonds https://en.wikipedia.org/wiki/Carter_bonds
- ohiovr 7y agoVery interesting. I did not know non dollar deominated us treasury debt exited.
- deleted 7y ago[deleted]