5 ms·

Can someone speculate on how this will actually play out in the coming decades?

lr4444lr 2mo ago
Anyone can speculate. If we fail to pay interest in a timely manner, then presumably fewer foreign entities will buy our debt, and we will have less money from debt sales to fund what debt funds. Whether that pain is spread equally or not is anyone's guess.
- fridder 2mo ago
  If we fail to pay interest in a timely manner is potentially catastrophic. US Bonds are considered a safe haven because we have never defaulted on our debt
  - engineer_22 2mo ago
    US bonds are a safe haven because the world’s oil supply is locked up by US warships.
    - verzali 1mo ago
      But it isn't. US warships proved incapable of keeping the Strait of Hormuz open. Oil is not flowing.
      - engineer_22 1mo ago
        have you considered that closing the straight may be one of the primary objectives of the war?
  - budman1 2mo ago
    The interest is only part of it ! How about paying back the principle when the bond comes due?
    - Beretta_Vexee 2mo ago
      The principal is repaid by issuing new bonds at maturity. This can be sustained for a long time if interest rates are low, but for much less time if rates rise. The volume of bonds being issued becomes so great that rates have to be raised to ensure they all find buyers. It is not as though the US Treasury can afford to wait until it finds a buyer at lower yield. It absolutely must sell these bonds to pay off the principal on the old ones.
      - budman1 2mo ago
        It's the payday loan principle. Loan comes due. I pay the interest. And rollover the principle. Problem is, now we are starting to add to the principle, because there isn't enough cash to cover the interest and keep the lights on.
ReptileMan 2mo ago
Scenario 1: It will be nothingburger right until the time it isn't. US can't default on its debt - so massive inflation and money printing until everything is rebalanced. Scenario 2: AI and robotics deliver growth on par with semiconductors and internet. Couple of decades of the economy growing faster than the debt will put it in manageable ratio. USA is really rich in resources, extremely well defended by geography, so I guess they will make do even in the worst scenarios.
budman1 2mo ago
International buyers will cool on the idea of holding US debt. US policy will artificially lower the interest rate to stimulate the economy. Also, the spending of the federal government will continue to increase above the tax receipts. This will result in inflation. Which is great if you owe money, since you are paying it back with cheaper money. But, the interest rates being low will make it easier to borrow? The resulting divide by zero in the economy (meaning an exception that there is no solution to) will result in the US government repudiating it's prior debt and making the 'new dollar'. This will cause a couple of years of chaos.
Beretta_Vexee 2mo ago
US government bond yields are regarded as the rate of return on a risk-free asset. So, for someone to decide to lend you money or invest in your business, you need to offer them a higher rate of return. This extra return is the risk premium. So when interest rates are close to 0 per cent, mortgages are cheap and everyone is prepared to risk their money on a slide deck promising significant losses over the next three years. Because cash yields next to nothing, investors race to generate returns elsewhere, which artificially depresses the risk premium. If US bonds are at 5 per cent, your banker will add their margin on top and your bank loan will be at least 7 per cent or higher if they fear a rise in interest rates and inflation. Investors will be much more discerning and demand higher risk premiums to move away from risk-free yields. As there are far fewer sectors capable of offering such returns, investment will concentrate on a very small number of sectors and companies (does AI ring a bell?). It is therefore the bond yield that affects us directly, rather than the volume of debt alone. The volume of debt does have an effect, however, as the bulk of the interest is paid by issuing new bonds. If the government repays with cheaper bonds, it isn’t too serious; but if rates rise, the impact on budget deficits is exponential. The thing is, the more debt and interest there is to pay, the more bonds need to be sold. To absorb this huge supply, the market demands higher yields to attract buyers, which in turn drives up borrowing costs for everyone.
- engineer_22 2mo ago
  The other half of the equation is what the government is spending the borrowed money on. The effect on the real economy is significant and pertinent to market performance of sectors.
  - Beretta_Vexee 2mo ago
    The Keynesian debt theory, the government should run up debt and support the economy during recessions, and then repay that debt quickly during periods of growth. This is not what is happening. Repaying the interest on debt held by a Norwegian pension fund has only a very minor impact on the US real economy.

Anyone can speculate. If we fail to pay interest in a timely manner, then presumably fewer foreign entities will buy our debt, and we will have less money from debt sales to fund what debt funds. Whether that pain is spread equally or not is anyone's guess.

fridder 2mo ago
If we fail to pay interest in a timely manner is potentially catastrophic. US Bonds are considered a safe haven because we have never defaulted on our debt
- engineer_22 2mo ago
  US bonds are a safe haven because the world’s oil supply is locked up by US warships.
  - verzali 1mo ago
    But it isn't. US warships proved incapable of keeping the Strait of Hormuz open. Oil is not flowing.
    - engineer_22 1mo ago
      have you considered that closing the straight may be one of the primary objectives of the war?
- budman1 2mo ago
  The interest is only part of it ! How about paying back the principle when the bond comes due?
  - Beretta_Vexee 2mo ago
    The principal is repaid by issuing new bonds at maturity. This can be sustained for a long time if interest rates are low, but for much less time if rates rise. The volume of bonds being issued becomes so great that rates have to be raised to ensure they all find buyers. It is not as though the US Treasury can afford to wait until it finds a buyer at lower yield. It absolutely must sell these bonds to pay off the principal on the old ones.
    - budman1 2mo ago
      It's the payday loan principle. Loan comes due. I pay the interest. And rollover the principle. Problem is, now we are starting to add to the principle, because there isn't enough cash to cover the interest and keep the lights on.

ReptileMan 2mo ago

Scenario 1: It will be nothingburger right until the time it isn't. US can't default on its debt - so massive inflation and money printing until everything is rebalanced. Scenario 2: AI and robotics deliver growth on par with semiconductors and internet. Couple of decades of the economy growing faster than the debt will put it in manageable ratio. USA is really rich in resources, extremely well defended by geography, so I guess they will make do even in the worst scenarios.

budman1 2mo ago

International buyers will cool on the idea of holding US debt. US policy will artificially lower the interest rate to stimulate the economy. Also, the spending of the federal government will continue to increase above the tax receipts. This will result in inflation. Which is great if you owe money, since you are paying it back with cheaper money. But, the interest rates being low will make it easier to borrow? The resulting divide by zero in the economy (meaning an exception that there is no solution to) will result in the US government repudiating it's prior debt and making the 'new dollar'. This will cause a couple of years of chaos.

Beretta_Vexee 2mo ago

US government bond yields are regarded as the rate of return on a risk-free asset. So, for someone to decide to lend you money or invest in your business, you need to offer them a higher rate of return. This extra return is the risk premium. So when interest rates are close to 0 per cent, mortgages are cheap and everyone is prepared to risk their money on a slide deck promising significant losses over the next three years. Because cash yields next to nothing, investors race to generate returns elsewhere, which artificially depresses the risk premium. If US bonds are at 5 per cent, your banker will add their margin on top and your bank loan will be at least 7 per cent or higher if they fear a rise in interest rates and inflation. Investors will be much more discerning and demand higher risk premiums to move away from risk-free yields. As there are far fewer sectors capable of offering such returns, investment will concentrate on a very small number of sectors and companies (does AI ring a bell?). It is therefore the bond yield that affects us directly, rather than the volume of debt alone. The volume of debt does have an effect, however, as the bulk of the interest is paid by issuing new bonds. If the government repays with cheaper bonds, it isn’t too serious; but if rates rise, the impact on budget deficits is exponential. The thing is, the more debt and interest there is to pay, the more bonds need to be sold. To absorb this huge supply, the market demands higher yields to attract buyers, which in turn drives up borrowing costs for everyone.

engineer_22 2mo ago
The other half of the equation is what the government is spending the borrowed money on. The effect on the real economy is significant and pertinent to market performance of sectors.
- Beretta_Vexee 2mo ago
  The Keynesian debt theory, the government should run up debt and support the economy during recessions, and then repay that debt quickly during periods of growth. This is not what is happening. Repaying the interest on debt held by a Norwegian pension fund has only a very minor impact on the US real economy.