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My understanding is that the US has so much more debt now than we did in the 80s that a rate hike of that magnitude would cause too much harm for the Fed to sto

My understanding is that the US has so much more debt now than we did in the 80s that a rate hike of that magnitude would cause too much harm for the Fed to stomach.

changoplatanero 4y ago
Harm to who? Aren’t rate hikes beneficial to entities that have a lot of debt?
- bobthepanda 4y ago
  The US rolls over debt by paying off debt with new debt. So interest rate hikes would eventually lead to a hike in interest payments on bonds. A sharp increase in bond interest payments set off the Greek crisis.
- mrgalaxy 4y ago
  I’m no expert here, so someone by all means correct me, but my understanding is that the fed rate correlates to the rate of interest the government has to pay on its debts. The higher the rate, the larger the chance that the government defaults which for the US would be catastrophic.
  - olivermarks 4y ago
    @mrgalaxy So long as the US onshore Dollar and offshore 'petrodollar' remain as the reserve currency of the planet default is unlikely as they essentially control all our planets money and can print more and more, or reduce money supply. It is good to be king.
  - JamesBarney 4y ago
    The US can't be forced to default. They can literally print money.
  - bombcar 4y ago
    https://www.crfb.org/blogs/just-how-big-are-federal-interest-payments https://www.crfb.org/blogs/just-how-big-are-federal-interest... > According to the Congressional Budget Office's (CBO) latest baseline, the federal government will spend $400 billion on interest payments on the national debt this fiscal year (FY). That's equivalent to just over 8 percent of all federal revenue collections and roughly $3,055 per household ... Interest costs and the national debt could be even higher if interest rates continue their upward trajectory and outperform CBO's latest economic forecast. Each one percentage point increase in interest rates would increase FY 2022 interest spending by $38 billion at today's debt levels. As the interest rate increases, those payments increase also - this is money that is spent and doesn't "get us anything more" - it's just maintaining the current debt load. The site linked is obviously arguing for "spend less money" but the math checks out, and if the debt never goes down interest rates can have a major effect. (Now sure, some/most of this debt is paid to the government itself.)
    - mrgalaxy 4y ago
      Wow thanks putting a number on it. I knew it was high but holy cow is that a lot of money for as you say, nothing more.
      - bombcar 4y ago
        To be fair, there's an argument that it's effectively the same as the government printing 400 billion a year, or something (this is MMT). I don't fully follow the argument and honestly it's not something really actionable by me. Personally it's all too complicated for me to think about and any analogies are going to fall short in horrible and painful ways.
- ceejayoz 4y ago
  Not if it's variable debt, like credit card interest.
- BobbyJo 4y ago
  Not if they can't pay it off, and need to roll over said debt, which is the case with the national debt.
- deleted 4y ago
  [deleted]
- notinfuriated 4y ago
  Inflation is beneficial to entities with a lot of debt. Lowers what they have to pay back in real dollars.
- Nifty3929 4y ago
  Harm to the politicians that like to spend borrowed money. [Edit: Remember that the US debt is constantly being refinanced at new (now higher) rates] Also remember that debt reflects money ALREADY spent and which therefore provides no additional value, while the ongoing cost of servicing that debt will climb and capture an increasing proportion of the national budget. If all goes well, this will result in reduced spending - but that's not likely. More likely is that this leads to EVEN MORE borrowing, which in turn causes MORE inflation. If we don't get a grip, this is what ultimately ends in a hyper-inflation death spiral as we've seen in other countries over the last 100 years. As the pie shrinks, the govt tries to preserve the absolute size of it's slice by spending more, which causes the pie to shrink still further.
- xyzzyz 4y ago
  To US government. It holds a lot of short term debt that it continuously rolls over into new short term debt. If the rate go up, new short term debt will become much more expensive to service. Here is a simple example with made up (but not completely off base) figures. Assume US government has debt amounting to 100% GDP. Assume also that it collects taxes amounting to 20% of GDP. If rates are 2%, then interest payments are 2% of GDP, which is 10% of the budget. Now, if bond rates go to, say, 6% (current mortgage rates), then interest payments are 6% of GDP, which is now actually 30% of the budget. Basically, at high debt-to-GDP ratio, small changes in the interest rates cause huge swings in how much budget is spent on interest payments. This money has to come from somewhere, and more debt is only a short term answer.
notinfuriated 4y ago
Too much harm for the Federal government to stomach when interest payments surpass tax revenue. Either tax hikes or spending cuts would have to occur, or go further into debt to pay interest on debt (???)
JumpCrisscross 4y ago
> the US has so much more debt now than we did in the 80s that a rate hike of that magnitude would cause too much harm for the Fed to stomach The Treasury pays interest on government debt. The Fed does not. Raising rates causes the Fed no harm other than (a) risking recession and (b) creating accounting losses idiots politicise. (The same way the Fed's accounting gains as it lowered rates are a useful fiction.) When the Fed raises rates, it increases the rate the U.S. pays on new debt. Over time the U.S. government's interest outlay would thus rise. But we're nowhere near that being an issue. To the degree it would be an issue, it would manifest as inflation. The specter rates are being raised to fight.
- bluGill 4y ago
  > Raising rates causes the Fed no harm other than (a) risking recession and (b) creating accounting losses idiots politicise There is C: politics. It is believed that the Fed is directly responsible for Carter losing to Reagan. (though it isn't clear how the election would have gone otherwise, it wouldn't have been the landslide it was) The Fed also reports to congressional hearings.
- naveen99 4y ago
  The fed pays interest on reserves and reverse repo. But it can just create deferred assets to pay for them… https://fedguy.com/fed-balance-sheet-faqs/ https://fedguy.com/fed-balance-sheet-faqs/
dageshi 4y ago
Inflation was high for quite a number of years before volker, they kept raising rates but then backed off from the economic pain and never succeeded in killing it completely. Volker came in and raised rates to the point where inflation was done. The point being, they can try to kill it first time, or maybe they have to raise even higher later on which would be even worse for the problem you're talking about. Also, they're on record as being fully aware of this.

My understanding is that the US has so much more debt now than we did in the 80s that a rate hike of that magnitude would cause too much harm for the Fed to stomach.

changoplatanero 4y ago

Harm to who? Aren’t rate hikes beneficial to entities that have a lot of debt?

bobthepanda 4y ago
The US rolls over debt by paying off debt with new debt. So interest rate hikes would eventually lead to a hike in interest payments on bonds. A sharp increase in bond interest payments set off the Greek crisis.
mrgalaxy 4y ago
I’m no expert here, so someone by all means correct me, but my understanding is that the fed rate correlates to the rate of interest the government has to pay on its debts. The higher the rate, the larger the chance that the government defaults which for the US would be catastrophic.
- olivermarks 4y ago
  @mrgalaxy So long as the US onshore Dollar and offshore 'petrodollar' remain as the reserve currency of the planet default is unlikely as they essentially control all our planets money and can print more and more, or reduce money supply. It is good to be king.
- JamesBarney 4y ago
  The US can't be forced to default. They can literally print money.
- bombcar 4y ago
  https://www.crfb.org/blogs/just-how-big-are-federal-interest-payments https://www.crfb.org/blogs/just-how-big-are-federal-interest... > According to the Congressional Budget Office's (CBO) latest baseline, the federal government will spend $400 billion on interest payments on the national debt this fiscal year (FY). That's equivalent to just over 8 percent of all federal revenue collections and roughly $3,055 per household ... Interest costs and the national debt could be even higher if interest rates continue their upward trajectory and outperform CBO's latest economic forecast. Each one percentage point increase in interest rates would increase FY 2022 interest spending by $38 billion at today's debt levels. As the interest rate increases, those payments increase also - this is money that is spent and doesn't "get us anything more" - it's just maintaining the current debt load. The site linked is obviously arguing for "spend less money" but the math checks out, and if the debt never goes down interest rates can have a major effect. (Now sure, some/most of this debt is paid to the government itself.)
  - mrgalaxy 4y ago
    Wow thanks putting a number on it. I knew it was high but holy cow is that a lot of money for as you say, nothing more.
    - bombcar 4y ago
      To be fair, there's an argument that it's effectively the same as the government printing 400 billion a year, or something (this is MMT). I don't fully follow the argument and honestly it's not something really actionable by me. Personally it's all too complicated for me to think about and any analogies are going to fall short in horrible and painful ways.
ceejayoz 4y ago
Not if it's variable debt, like credit card interest.
BobbyJo 4y ago
Not if they can't pay it off, and need to roll over said debt, which is the case with the national debt.
deleted 4y ago
[deleted]
notinfuriated 4y ago
Inflation is beneficial to entities with a lot of debt. Lowers what they have to pay back in real dollars.
Nifty3929 4y ago
Harm to the politicians that like to spend borrowed money. [Edit: Remember that the US debt is constantly being refinanced at new (now higher) rates] Also remember that debt reflects money ALREADY spent and which therefore provides no additional value, while the ongoing cost of servicing that debt will climb and capture an increasing proportion of the national budget. If all goes well, this will result in reduced spending - but that's not likely. More likely is that this leads to EVEN MORE borrowing, which in turn causes MORE inflation. If we don't get a grip, this is what ultimately ends in a hyper-inflation death spiral as we've seen in other countries over the last 100 years. As the pie shrinks, the govt tries to preserve the absolute size of it's slice by spending more, which causes the pie to shrink still further.
xyzzyz 4y ago
To US government. It holds a lot of short term debt that it continuously rolls over into new short term debt. If the rate go up, new short term debt will become much more expensive to service. Here is a simple example with made up (but not completely off base) figures. Assume US government has debt amounting to 100% GDP. Assume also that it collects taxes amounting to 20% of GDP. If rates are 2%, then interest payments are 2% of GDP, which is 10% of the budget. Now, if bond rates go to, say, 6% (current mortgage rates), then interest payments are 6% of GDP, which is now actually 30% of the budget. Basically, at high debt-to-GDP ratio, small changes in the interest rates cause huge swings in how much budget is spent on interest payments. This money has to come from somewhere, and more debt is only a short term answer.

notinfuriated 4y ago

Too much harm for the Federal government to stomach when interest payments surpass tax revenue. Either tax hikes or spending cuts would have to occur, or go further into debt to pay interest on debt (???)

JumpCrisscross 4y ago

> the US has so much more debt now than we did in the 80s that a rate hike of that magnitude would cause too much harm for the Fed to stomach The Treasury pays interest on government debt. The Fed does not. Raising rates causes the Fed no harm other than (a) risking recession and (b) creating accounting losses idiots politicise. (The same way the Fed's accounting gains as it lowered rates are a useful fiction.) When the Fed raises rates, it increases the rate the U.S. pays on new debt. Over time the U.S. government's interest outlay would thus rise. But we're nowhere near that being an issue. To the degree it would be an issue, it would manifest as inflation. The specter rates are being raised to fight.

bluGill 4y ago
> Raising rates causes the Fed no harm other than (a) risking recession and (b) creating accounting losses idiots politicise There is C: politics. It is believed that the Fed is directly responsible for Carter losing to Reagan. (though it isn't clear how the election would have gone otherwise, it wouldn't have been the landslide it was) The Fed also reports to congressional hearings.
naveen99 4y ago
The fed pays interest on reserves and reverse repo. But it can just create deferred assets to pay for them… https://fedguy.com/fed-balance-sheet-faqs/ https://fedguy.com/fed-balance-sheet-faqs/

dageshi 4y ago

Inflation was high for quite a number of years before volker, they kept raising rates but then backed off from the economic pain and never succeeded in killing it completely. Volker came in and raised rates to the point where inflation was done. The point being, they can try to kill it first time, or maybe they have to raise even higher later on which would be even worse for the problem you're talking about. Also, they're on record as being fully aware of this.