7 ms·

Something I haven’t seen discussed much is the impact of inflation on the existing federal debt. This is actually a positive for taxpayers as the federal debt

Something I haven’t seen discussed much is the impact of inflation on the existing federal debt. This is actually a positive for taxpayers as the federal debt will become cheaper. Obviously we’re still spending a ton and are issuing debt at higher rates now, so it’s not some kind of magic cure or anything.

maerF0x0 4y ago
Sort of. But the government also has a deficit. Which means it's exchanging low % notes for high % notes.
- QuarterReptile 4y ago
  Nitpick: Bonds coming to term means it's exchanging low% for high %. Deficit means that the problem accelerates even faster than that, because the total value of bonds continues to increase.
countvonbalzac 4y ago
I read something like this actually isn't the panacea it seems like in the long term because inflation reduces real growth long term, or something like that.
- smileysteve 4y ago
  That's an odd conclusion; yes real growth is impacted by inflation, but inflation is a reason to seek growth rather than rent.
readams 4y ago
Most of the debt is shorter term and must be continually rolled over. So when first moving from low expectations of inflation to high expectations, there is a temporary one-time gain, but after that the government will need to pay higher interest. And of course when the expectations return to normal there is a period when the government must pay higher than needed rates.
- dnadler 4y ago
  Good point - that's all true. Another important point is that the principal has also been impacted by inflation and the amount that needs to be rolled is less than the initial bond in real terms.
- upsidesinclude 4y ago
  So the government just maxed out on an ARM they can't afford
timmg 4y ago
Related (but different): I'm wondering how much inflation will shift tax payers into higher brackets and increase the overall income for the government from those taxes.
- prometheus76 4y ago
  You probably know this already, but I thought I'd pass on a correction to what is a common misconception. If you start making more money and end up in a higher tax bracket, only the amount of income in the new tax bracket is taxed at the higher rate, not the whole income. For example: Pretend you currently make $75,000/yr and the next tax bracket is at $80,000. And you get a nice raise to make your salary $85,000 this year. Only $5,000 of your new income (the amount "above the next tax bracket") will be charged at the higher rate.
  - timmg 4y ago
    > You probably know this already, but I thought I'd pass on a correction to what is a common misconception. If you start making more money and end up in a higher tax bracket, only the amount of income in the new tax bracket is taxed at the higher rate, not the whole income. Oh, for sure. But that money that moves into those brackets will be taxed higher.
    - kgwgk 4y ago
      You don’t need to change brackets: the incremental money will always be taxed at a higher rate that the average you were paying and the average will go up.
  - medvezhenok 4y ago
    Yes - the caveat here is that if the raise is due to inflation then your real post-tax salary can go down. (i.e. For an absurd example - suppose inflation is 100%. Last year you made 50K, this year you make 100K, which is the same in real terms (after inflation)). However, you will pay more of that 100K in tax than you would have last year, so your real income will decrease. This tax drag can also happen for investments. If your investment goes up 100% and inflation is also 100%, you pay tax on the inflated nominal value of your investment even though the real value has not changed. Long term capital gains taxes are one way to reduce the impact of this - but they don't eliminate it altogether. Tax brackets are usually (but not always) inflation-indexed to avoid this effect.
cavisne 4y ago
Is the debt rate fixed on federal debt? I can’t find much info on this. Ie if the fed funds rate doubles what’s the impact on the interest rate payments the government makes.
- drexlspivey 4y ago
  Yes the bond coupon payments are fixed, only the newly issued debt will be affected.
  - cavisne 4y ago
    Fixed over what time period? I think the interest paid is public knowledge, im wondering if the breakdown of rates/terms is known. What I'm curious about is what it would look like if interest rates went to 10% in terms of the interest payments (as loans mature and rollover etc)
    - bombcar 4y ago
      Apparently much of the debt is in short-term bonds (which is expected, since the interest rates were low why would you want long term bonds?).
- gvhst 4y ago
  Most US Gov debt is fixed rate debt, however the government issues new debt all the time, which is issued at a yield that is set by a Dutch Auction [0] [0] - https://home.treasury.gov/services/treasury-auctions https://home.treasury.gov/services/treasury-auctions
QuarterReptile 4y ago
It's true that we are incrementally getting out of debt commitments by debasing the currency But as others have pointed out, bonds eventually come to term and then have to be rolled over into the higher prevailing interest rate. With such a high debt burden, that debt service can become a significant portion of all tax receipts, at which point all services are funded from deficit spending. 2021 tax receipts estimate is $3.86trillion [0]. Debt stands at roughly $30.5trillion. Ignoring compounding for simplicity's sake, 12.7% rates would mean 100% of taxes go just to pay for servicing current debt. When you look into discretionary spending (stuff outside of medicare/medicaid/social security) it's way worse. Subtract that away from the $3.86trillion and you only have $3.86- (1.3+1.1) = $1.46trillion to spend on defense, all services, and debt service from tax receipts. 1.46/30.5 = 4.8%, meaning that no tax receipts cover defense or any discretionary spending (services) if rates hit 4.8% (actually lower because of compounding), and all services are from debt. The most recent White House budget [2] suggests 10-year treasury bills will hit 2.8% by 2028; your faith in that number comprises a major part of your faith in the long-term solvency of the US government. [0]https://www.whitehouse.gov/wp-content/uploads/2020/02/budget_fy21.pdf https://www.whitehouse.gov/wp-content/uploads/2020/02/budget... [debt, medicare/medicaid, and social security numbers] https://www.usdebtclock.org/ https://www.usdebtclock.org/ [2] https://www.whitehouse.gov/wp-content/uploads/2021/05/budget_fy22.pdf https://www.whitehouse.gov/wp-content/uploads/2021/05/budget... Edited for sources formatting
- helloooooooo 4y ago
  Gotta love slashing taxes for the sake of slashing taxes.
  - deleted 4y ago
    [deleted]
- moneywoes 4y ago
  So the other becomes raising taxes right? Or MMT?
  - QuarterReptile 4y ago

maerF0x0 4y ago

Sort of. But the government also has a deficit. Which means it's exchanging low % notes for high % notes.

QuarterReptile 4y ago
Nitpick: Bonds coming to term means it's exchanging low% for high %. Deficit means that the problem accelerates even faster than that, because the total value of bonds continues to increase.

countvonbalzac 4y ago

I read something like this actually isn't the panacea it seems like in the long term because inflation reduces real growth long term, or something like that.

smileysteve 4y ago
That's an odd conclusion; yes real growth is impacted by inflation, but inflation is a reason to seek growth rather than rent.

readams 4y ago

Most of the debt is shorter term and must be continually rolled over. So when first moving from low expectations of inflation to high expectations, there is a temporary one-time gain, but after that the government will need to pay higher interest. And of course when the expectations return to normal there is a period when the government must pay higher than needed rates.

dnadler 4y ago
Good point - that's all true. Another important point is that the principal has also been impacted by inflation and the amount that needs to be rolled is less than the initial bond in real terms.
upsidesinclude 4y ago
So the government just maxed out on an ARM they can't afford

timmg 4y ago

Related (but different): I'm wondering how much inflation will shift tax payers into higher brackets and increase the overall income for the government from those taxes.

prometheus76 4y ago
You probably know this already, but I thought I'd pass on a correction to what is a common misconception. If you start making more money and end up in a higher tax bracket, only the amount of income in the new tax bracket is taxed at the higher rate, not the whole income. For example: Pretend you currently make $75,000/yr and the next tax bracket is at $80,000. And you get a nice raise to make your salary $85,000 this year. Only $5,000 of your new income (the amount "above the next tax bracket") will be charged at the higher rate.
- timmg 4y ago
  > You probably know this already, but I thought I'd pass on a correction to what is a common misconception. If you start making more money and end up in a higher tax bracket, only the amount of income in the new tax bracket is taxed at the higher rate, not the whole income. Oh, for sure. But that money that moves into those brackets will be taxed higher.
  - kgwgk 4y ago
    You don’t need to change brackets: the incremental money will always be taxed at a higher rate that the average you were paying and the average will go up.
- medvezhenok 4y ago
  Yes - the caveat here is that if the raise is due to inflation then your real post-tax salary can go down. (i.e. For an absurd example - suppose inflation is 100%. Last year you made 50K, this year you make 100K, which is the same in real terms (after inflation)). However, you will pay more of that 100K in tax than you would have last year, so your real income will decrease. This tax drag can also happen for investments. If your investment goes up 100% and inflation is also 100%, you pay tax on the inflated nominal value of your investment even though the real value has not changed. Long term capital gains taxes are one way to reduce the impact of this - but they don't eliminate it altogether. Tax brackets are usually (but not always) inflation-indexed to avoid this effect.

cavisne 4y ago

Is the debt rate fixed on federal debt? I can’t find much info on this. Ie if the fed funds rate doubles what’s the impact on the interest rate payments the government makes.

drexlspivey 4y ago
Yes the bond coupon payments are fixed, only the newly issued debt will be affected.
- cavisne 4y ago
  Fixed over what time period? I think the interest paid is public knowledge, im wondering if the breakdown of rates/terms is known. What I'm curious about is what it would look like if interest rates went to 10% in terms of the interest payments (as loans mature and rollover etc)
  - bombcar 4y ago
    Apparently much of the debt is in short-term bonds (which is expected, since the interest rates were low why would you want long term bonds?).
gvhst 4y ago
Most US Gov debt is fixed rate debt, however the government issues new debt all the time, which is issued at a yield that is set by a Dutch Auction [0] [0] - https://home.treasury.gov/services/treasury-auctions https://home.treasury.gov/services/treasury-auctions

QuarterReptile 4y ago

It's true that we are incrementally getting out of debt commitments by debasing the currency But as others have pointed out, bonds eventually come to term and then have to be rolled over into the higher prevailing interest rate. With such a high debt burden, that debt service can become a significant portion of all tax receipts, at which point all services are funded from deficit spending. 2021 tax receipts estimate is $3.86trillion [0]. Debt stands at roughly $30.5trillion. Ignoring compounding for simplicity's sake, 12.7% rates would mean 100% of taxes go just to pay for servicing current debt. When you look into discretionary spending (stuff outside of medicare/medicaid/social security) it's way worse. Subtract that away from the $3.86trillion and you only have $3.86- (1.3+1.1) = $1.46trillion to spend on defense, all services, and debt service from tax receipts. 1.46/30.5 = 4.8%, meaning that no tax receipts cover defense or any discretionary spending (services) if rates hit 4.8% (actually lower because of compounding), and all services are from debt. The most recent White House budget [2] suggests 10-year treasury bills will hit 2.8% by 2028; your faith in that number comprises a major part of your faith in the long-term solvency of the US government. [0]https://www.whitehouse.gov/wp-content/uploads/2020/02/budget_fy21.pdf https://www.whitehouse.gov/wp-content/uploads/2020/02/budget... [debt, medicare/medicaid, and social security numbers] https://www.usdebtclock.org/ https://www.usdebtclock.org/ [2] https://www.whitehouse.gov/wp-content/uploads/2021/05/budget_fy22.pdf https://www.whitehouse.gov/wp-content/uploads/2021/05/budget... Edited for sources formatting

helloooooooo 4y ago
Gotta love slashing taxes for the sake of slashing taxes.
- deleted 4y ago
  [deleted]
moneywoes 4y ago
So the other becomes raising taxes right? Or MMT?
- QuarterReptile 4y ago