7 ms·

I have heard the case that the Fed can't raise rates due to the high debt to GDP ratio we currently have and this would make the interest payments too high. Is

I have heard the case that the Fed can't raise rates due to the high debt to GDP ratio we currently have and this would make the interest payments too high. Is there any truth to that? I am by no means an expert, but this doesn't make sense to me. If the choices are runaway inflation and making higher interest payments and making the debt to GDP ratio worse, the choice seems obvious.

snake_doc 4y ago
Technically it is a constraint on monetary policy. But the US is no where close to where it is a concern, and it only usually matters in countries where there is a history of sovereign debt defaults. The US treasury debt is deemed by global financial markets as risk free.
JumpCrisscross 4y ago
> the Fed can't raise rates due to the high debt to GDP ratio we currently have and this would make the interest payments too high. Is there any truth to that? No. The Fed is raising rates. They raised rates yesterday. They say they intend to keep doing so through the end of the year. Net interest is a low single digit percent of the federal budget; it's lower as a fraction of GDP than it was in the 90s [1]. Most of the federal debt is fixed rate--raising rates now only affects future borrowing. The real limit on rates is growth and employment. If the economy falters because people are spending all their money on servicing debts over goods and services, we'll see a crunch. That's not happening. The opposite is happening: inflation is surging. [1] https://www.cbo.gov/publication/56910 https://www.cbo.gov/publication/56910
- ericd 4y ago
  They can and are raising rates, but do you think it’s feasible for them to go full Volcker if that’s what it takes to beat back inflation? When I worry about the debt to GDP ratio, it’s not about whether we can withstand bumping from 0% to 1-2%, it’s whether we can withstand historically normal ranges, let alone what it took in the 80s.
  - JumpCrisscross 4y ago
    > do you think it’s feasible for them to go full Volcker if that’s what it takes to beat back inflation? "US inflation, which peaked at 14.8 percent in March 1980, fell below 3 percent by 1983...Volcker raised the federal funds rate, which had averaged 11.2% in 1979, to a peak of 20% in June 1981" [1]. For comparison, we're currently around 8.5% [2] and 0.75% to 1%, respectively. Long-term rates are below 4% [3]. There is no need to tip the economy into a recession at this time. If we needed to, the constraint would be--as it was in Volcker's time--political. If we were suffering double-digit inflation, I suspect the will would be there. [1] https://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_the_Federal_Reserve https://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_the_F... [2] https://fred.stlouisfed.org/graph/?g=rocU https://fred.stlouisfed.org/graph/?g=rocU [3] https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202205 https://home.treasury.gov/resource-center/data-chart-center/...
    - smileysteve 4y ago
      What doesn't make headlines is the longer term average for inflation as well; The diminishing effectiveness (in part based on global unison from 2008) meant that the federal reserve could not reach its target 2% inflation a year from 2008 until 2021. In a history of being under inflation targets by .5% for 14 years, 8.5% in one year is partly a headline grabber. And we have wage growth happening.
      - JumpCrisscross 4y ago
        > the federal reserve could not reach its target 2% inflation a year from 2008 until 2021 This is an excellent point. Between January 2012 and January 2022, CPI-U grew at 2.2% annually [1][a]. [1] https://www.bls.gov/regions/mid-atlantic/data/consumerpriceindexhistorical_us_table.htm https://www.bls.gov/regions/mid-atlantic/data/consumerpricei... [a] (281.148 / 226.665) ^ (1 / 10) - 1
- newaccount2021 4y ago
- drdec 4y ago
  I suspect you are better versed in this subject than I am but what about the idea that the US has essentially already committed to heavy borrowing to finance the government for the foreseeable future? Wouldn't that be a deterrent along the lines the grandparent comment was suggesting?
- onlyrealcuzzo 4y ago
  > The Fed is raising rates. They raised rates yesterday. They say they intend to keep doing so through the end of the year. Net interest is a low single digit percent of the federal budget; it's lower as a fraction of GDP than it was in the 90s [1]. Most of the federal debt is fixed rate--raising rates now only affects future borrowing. I think the question is: can we sustain 5%+ interest rates? The answer is no - unless GDP increases precipitously or government spending declines A LOT. Imagine 5% is the new norm. In 30 years, the government will have 100% of public debt at 5% interest. At 139% debt to GDP - that's 7% of GDP going to debt financing. Federal revenue is only ~18% of GDP. That means 38% of taxes would go to debt financing. And if trends continue - within 30 years, public debt to GDP would likely be closer to 180%. So 50% of taxes would go to debt financing. It's simply not possible long term (unless there is some MASSIVE unknown boost to productivity to save us). Interest rates might go up to 20% for a year here and there. Who knows. They'll be hovering around 0 or negative and steadily going lower for most of our lives - unless we reach the singularity.
  - JumpCrisscross 4y ago
    > the question is can we sustain 5% interest rates. The answer is no - unless GDP increases precipitously or government spending declines A LOT We can’t sustain 5% real interest rates. But nominal GDP, rates and tax take are inherently linked; if short-term rates are 5% for 30 years it’s because inflation and/or the economy are going gangbusters. That will drive up GDP and tax collection. Until it doesn’t. Then we have a recession and all those numbers go down. This isn’t infinitely extensible. But we’re nowhere close to federal debt servicing being a constraint on the Fed or the Congress. Inflation, instead, remains the check.
    - onlyrealcuzzo 4y ago
      > But we’re nowhere close to federal debt servicing being a constraint on the Fed or the Congress. Inflation, instead, remains the check. Not a constraint in the SHORT TERM. Long term, it is absolutely a constraint. As I said, Interest rates can go up. But long-term trend will be hovering around the negatives (unless there's a MASSIVE boost to productivity).
- dh2022 4y ago
  Most of government debt is due in a few years [1]. The interest rate is fixed as long as the government will pay off the debt on schedule. With the current debt load Gov will not pay its debt on schedule. When the debt will become due the gov will roll it over - it will basically get another loan to pay the loan that is due. If at that time the interest rates will be higher then interest expense will be higher as well. [1] https://www.treasurydirect.gov/govt/reports/pd/feddebt/feddebt_ann2021.pdf https://www.treasurydirect.gov/govt/reports/pd/feddebt/fedde...
chasd00 4y ago
> I have heard the case that the Fed can't raise rates... i think it's more political. A while back I was driving to pick up my son from a school thing and there was an interview on NPR with the fed. I can't remember the exact date but a number of months ago. The fed was going on and on about how great the Build Back Better plan is and was going to be and now the inflation that was beginning to show was all due to supply chain issues and will be sorted out in a few months. I think the fed didn't want to raise rates and held out this long for political reasons only. Now, not raising rates presents more risk to the administration in power than raising rates and so here we are.
- gsibble 4y ago
  Indeed. The Fed is supposed to be politically neutral so for them to be supporting one party's major bill is a clear violation of that. And I fully believe they didn't raise rates earlier for political reasons.
  - lotsofpulp 4y ago
    The Fed will never let asset prices fall in general, because it benefits all politicians and most voters to keep them rising. Voters want to see their 401k and IRAs going up, as long as their expenses go up slower.
    - gsibble 4y ago
      The thing is all of those assets are generally only owned by the top 5% (mostly top 1%) of the wealthy, so in reality, the Fed only serves the interests of the wealthy and everyone else gets screwed.
  - AnimalMuppet 4y ago
    The Fed is supposed to be politically neutral, that is, not acting to help one party or the other. But that does not mean that the Fed has no opinion on the effects of big fiscal decisions. It is perfectly within the remit of the Fed for them to suggest that a large amount of Federal spending would currently be a good idea, and that it could usefully be applied to some end.
landemva 4y ago
>>> high debt to GDP ratio we currently have and this would make the interest payments too high. USA can you use Federal Reserve to monetize debt at low rates. Europe and others can't. Pensions have been hit hard since 2008 because laddered bonds no longer yield sufficiently. The solution is a worldwide government debt default, with UBI after pensions default. While I don't want this socialism, world politicians seem to follow Klaus Schwab's idea on this.

snake_doc 4y ago

Technically it is a constraint on monetary policy. But the US is no where close to where it is a concern, and it only usually matters in countries where there is a history of sovereign debt defaults. The US treasury debt is deemed by global financial markets as risk free.

JumpCrisscross 4y ago

> the Fed can't raise rates due to the high debt to GDP ratio we currently have and this would make the interest payments too high. Is there any truth to that? No. The Fed is raising rates. They raised rates yesterday. They say they intend to keep doing so through the end of the year. Net interest is a low single digit percent of the federal budget; it's lower as a fraction of GDP than it was in the 90s [1]. Most of the federal debt is fixed rate--raising rates now only affects future borrowing. The real limit on rates is growth and employment. If the economy falters because people are spending all their money on servicing debts over goods and services, we'll see a crunch. That's not happening. The opposite is happening: inflation is surging. [1] https://www.cbo.gov/publication/56910 https://www.cbo.gov/publication/56910

ericd 4y ago
They can and are raising rates, but do you think it’s feasible for them to go full Volcker if that’s what it takes to beat back inflation? When I worry about the debt to GDP ratio, it’s not about whether we can withstand bumping from 0% to 1-2%, it’s whether we can withstand historically normal ranges, let alone what it took in the 80s.
- JumpCrisscross 4y ago
  > do you think it’s feasible for them to go full Volcker if that’s what it takes to beat back inflation? "US inflation, which peaked at 14.8 percent in March 1980, fell below 3 percent by 1983...Volcker raised the federal funds rate, which had averaged 11.2% in 1979, to a peak of 20% in June 1981" [1]. For comparison, we're currently around 8.5% [2] and 0.75% to 1%, respectively. Long-term rates are below 4% [3]. There is no need to tip the economy into a recession at this time. If we needed to, the constraint would be--as it was in Volcker's time--political. If we were suffering double-digit inflation, I suspect the will would be there. [1] https://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_the_Federal_Reserve https://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_the_F... [2] https://fred.stlouisfed.org/graph/?g=rocU https://fred.stlouisfed.org/graph/?g=rocU [3] https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202205 https://home.treasury.gov/resource-center/data-chart-center/...
  - smileysteve 4y ago
    What doesn't make headlines is the longer term average for inflation as well; The diminishing effectiveness (in part based on global unison from 2008) meant that the federal reserve could not reach its target 2% inflation a year from 2008 until 2021. In a history of being under inflation targets by .5% for 14 years, 8.5% in one year is partly a headline grabber. And we have wage growth happening.
    - JumpCrisscross 4y ago
      > the federal reserve could not reach its target 2% inflation a year from 2008 until 2021 This is an excellent point. Between January 2012 and January 2022, CPI-U grew at 2.2% annually [1][a]. [1] https://www.bls.gov/regions/mid-atlantic/data/consumerpriceindexhistorical_us_table.htm https://www.bls.gov/regions/mid-atlantic/data/consumerpricei... [a] (281.148 / 226.665) ^ (1 / 10) - 1
newaccount2021 4y ago
drdec 4y ago
I suspect you are better versed in this subject than I am but what about the idea that the US has essentially already committed to heavy borrowing to finance the government for the foreseeable future? Wouldn't that be a deterrent along the lines the grandparent comment was suggesting?
onlyrealcuzzo 4y ago
> The Fed is raising rates. They raised rates yesterday. They say they intend to keep doing so through the end of the year. Net interest is a low single digit percent of the federal budget; it's lower as a fraction of GDP than it was in the 90s [1]. Most of the federal debt is fixed rate--raising rates now only affects future borrowing. I think the question is: can we sustain 5%+ interest rates? The answer is no - unless GDP increases precipitously or government spending declines A LOT. Imagine 5% is the new norm. In 30 years, the government will have 100% of public debt at 5% interest. At 139% debt to GDP - that's 7% of GDP going to debt financing. Federal revenue is only ~18% of GDP. That means 38% of taxes would go to debt financing. And if trends continue - within 30 years, public debt to GDP would likely be closer to 180%. So 50% of taxes would go to debt financing. It's simply not possible long term (unless there is some MASSIVE unknown boost to productivity to save us). Interest rates might go up to 20% for a year here and there. Who knows. They'll be hovering around 0 or negative and steadily going lower for most of our lives - unless we reach the singularity.
- JumpCrisscross 4y ago
  > the question is can we sustain 5% interest rates. The answer is no - unless GDP increases precipitously or government spending declines A LOT We can’t sustain 5% real interest rates. But nominal GDP, rates and tax take are inherently linked; if short-term rates are 5% for 30 years it’s because inflation and/or the economy are going gangbusters. That will drive up GDP and tax collection. Until it doesn’t. Then we have a recession and all those numbers go down. This isn’t infinitely extensible. But we’re nowhere close to federal debt servicing being a constraint on the Fed or the Congress. Inflation, instead, remains the check.
  - onlyrealcuzzo 4y ago
    > But we’re nowhere close to federal debt servicing being a constraint on the Fed or the Congress. Inflation, instead, remains the check. Not a constraint in the SHORT TERM. Long term, it is absolutely a constraint. As I said, Interest rates can go up. But long-term trend will be hovering around the negatives (unless there's a MASSIVE boost to productivity).
dh2022 4y ago
Most of government debt is due in a few years [1]. The interest rate is fixed as long as the government will pay off the debt on schedule. With the current debt load Gov will not pay its debt on schedule. When the debt will become due the gov will roll it over - it will basically get another loan to pay the loan that is due. If at that time the interest rates will be higher then interest expense will be higher as well. [1] https://www.treasurydirect.gov/govt/reports/pd/feddebt/feddebt_ann2021.pdf https://www.treasurydirect.gov/govt/reports/pd/feddebt/fedde...

chasd00 4y ago

> I have heard the case that the Fed can't raise rates... i think it's more political. A while back I was driving to pick up my son from a school thing and there was an interview on NPR with the fed. I can't remember the exact date but a number of months ago. The fed was going on and on about how great the Build Back Better plan is and was going to be and now the inflation that was beginning to show was all due to supply chain issues and will be sorted out in a few months. I think the fed didn't want to raise rates and held out this long for political reasons only. Now, not raising rates presents more risk to the administration in power than raising rates and so here we are.

gsibble 4y ago
Indeed. The Fed is supposed to be politically neutral so for them to be supporting one party's major bill is a clear violation of that. And I fully believe they didn't raise rates earlier for political reasons.
- lotsofpulp 4y ago
  The Fed will never let asset prices fall in general, because it benefits all politicians and most voters to keep them rising. Voters want to see their 401k and IRAs going up, as long as their expenses go up slower.
  - gsibble 4y ago
    The thing is all of those assets are generally only owned by the top 5% (mostly top 1%) of the wealthy, so in reality, the Fed only serves the interests of the wealthy and everyone else gets screwed.
- AnimalMuppet 4y ago
  The Fed is supposed to be politically neutral, that is, not acting to help one party or the other. But that does not mean that the Fed has no opinion on the effects of big fiscal decisions. It is perfectly within the remit of the Fed for them to suggest that a large amount of Federal spending would currently be a good idea, and that it could usefully be applied to some end.

landemva 4y ago

>>> high debt to GDP ratio we currently have and this would make the interest payments too high. USA can you use Federal Reserve to monetize debt at low rates. Europe and others can't. Pensions have been hit hard since 2008 because laddered bonds no longer yield sufficiently. The solution is a worldwide government debt default, with UBI after pensions default. While I don't want this socialism, world politicians seem to follow Klaus Schwab's idea on this.