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With debt to GDP at such high ratios raising interest rates has some challenges, why do you think this is easy to deal with?
by JanisL 5y ago
With debt to GDP at such high ratios raising interest rates has some challenges, why do you think this is easy to deal with?
- shrimpx 5y agoCurious, why do you think it’s difficult to raise interest rates when debt is high?
- IG_Semmelweiss 5y agoSimple. As your interest increases, sondo your payments as a % of taxes At some point, if interest payments are too big of a slice off total spend, investors will start believeing the debt will never be repaid... And thus monetise debt instead.
- shnp 5y agoDebt levels being high means that a significant portion of the revenue is there to service the interest payments and the remaining is not enough to cover all other expenses. Therefore you either raise more debt, or default.
- JanisL 5y agoAt the moment we have a monetary system that's a debt based monetary system. In practice this means that many people are operating under the assumption that someone's liability is someone else's asset, I think this assumption is rather systemic at the moment. Beyond a certain level of indebtedness a rise in interest rates triggers off a chain of defaults and that can cause a situation of credit contagion. An uncontrolled credit contagion event could very conceivably destroy the financial system. Much power is currently held by creditors and they will likely try to fight any attempts to change policy in such a way that reduces their power. Here's a much more long form article that talks about the dynamics in play: https://desogames.substack.com/p/the-problem-is-too-big https://desogames.substack.com/p/the-problem-is-too-big
- shnp 5y agoAlso, no president or congress wants to be at the helm of a ‘self inflicted’ recession. Every politian just kicks the can down the road.
- shrimpx 5y agoThanks, and thanks for the linked newsletter. I’ll read it. I’m curious to learn how the current situation compares to the 80s when rates were pushed to 15% to stop inflation.
- dragonwriter 5y ago> With debt to GDP at such high ratios raising interest rates has some challenges No, it doesn't. I mean, it would have political problems if Congress had to do it, but that's literally why we have an independent central bank managing monetary policy, so decisions that would be difficult given fiscal policy preferences aren’t difficult to make. > why do you think this is easy to deal with? Because it is.