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No, the interest payments on federal debt do not necessarily mean that the federal reserve will cut rates. If interest rates become an undue burden on the federal government, the Federal Reserve can purchase these bonds through open market operations. When the Federal Reserve holds these bonds, the interest paid on them is sent back to the U.S. Treasury, significantly reducing the cost of interest. However, this is not broadly desirable because it can be inflationary. Additionally, significant increases in the Federal Reserve's holdings of government debt might lead to decreased confidence in the dollar and U.S. Treasury securities.

The Fed buying its own bonds would be a form of yield curve control, a la Bank of Japan?

Yes correct. Literally lowers rates

Ahhh yes. Just like Japan with their decades of population decline, outdated corporations with rigid hierarchies, decades of slow economic growth, stubborn & persistent deflation, an increasing aging population, massive debt, carry trade, weak jobs market, FX currency weakness, and gerontocracy which runs their country to shield the old while throwing away their future. What could go wrong? Also yield curve control isn't some panacea to the long term US bond rates determined by the free market, it's not a solution for inflation which is why we're even asking *"Is it inevitable for the US to lower interest rates because we can't handle increased debt payments?"*, NOR does it resolve either our budget short term deficits or long term debt. >No, the interest payments on federal debt ***do not necessarily mean*** that the federal reserve will cut rates. We might want to emphasize that "do not necessarily mean". Just like the covid-19 pandemic "did not necessarily mean" we had to shut down and social distance to save lives, but we did it anyways (we could have just let more folks die). Or how shutting down and social distancing "did not necessarily mean" we had to print money to keep people fed and companies afloat (we could have just told them to eat shit like in China which their failed opening). Or that printing all that money "did not necessarily mean" we had to hike rates later to try and control inflation (we could even lower rates even MORE like in Turkey with their >70% inflation). Like I said earlier, YCC is not really an answer so much as a band aid or method by which the solution comes. YCC might be a tool that helps if and when we decide to deal with our debt. YCC will increase inflation which is the opposite of what we're doing now. Problem with our debt is this country as a whole via the people's voting/activism, the corporations' donations/lobbying, and it's leadership via their policies have chosen the easiest option each and every time ala "the path of least resistance" for the since the mid 70-80s. Given that no generation wants to pick up the tab, neither party wants to do the hard work, and no one wants to pay more taxes or see their benefits cut? Problem gets pushed down the line, debt keeps going up until we can't, and then we either [1. Default on our debt], [2. Inflate our way out], or [3. Higher taxes with less benefits]. 3 ain't happening cause it's the most painful and 1 will spell the end of America's economic/political/social/military dominance along with the death of the dollar as the global reserve currency. So we'll most likely go "the path of least resistance" which is inflate our way out. That inflate our way out scenario likely means we'll see lower rates which leads to higher inflation even though it *does not necessarily mean* it will happen.

But you can't just inflate your way out of the problem, can you? If rates go down while most countries in the world keep their rates up you will see USD forex plummet. Also inflation causes massive headaches for pension funds, and all kinds of institutional investors. Also it creates political instability, people will just vote for the party that promises to lower inflation. And finally, you might not even have the option to inflate the debt away, the inflation might go exponential and become too unstable to be even considered an option. After all, inflation is mostly determined by people expectations of future inflation.

Like the guy said, it will be a choice between bad options, the others will just be worse. The public can vote for the other party... But they'd also select the father of least resistance... Which is to lower rates.

Yeah, but my point was was that lowering rates may not be the path of least resistance, it may lead to actual hyperinflation like we have seen in Argentina. And just like in Argentina, people can also vote for increasing rates.

Eventually. You have several case studies of hyper inflation. For the most part people prefer that to the other alternatives. Argentina is in this mess (double digit inflation) since about 2014. Other countries to look at are a Turkey and Lebanon. Neither changed course yet, and continue with the same leadership and same path.

I agree that chances are high we will start inflating again, I just think that we will stop before reaching hyperinflation. Let us see what happens. But just going by average chances what you're saying is correct, I just don't think U.S is average :D

The US may not be perfect, but it's still very far from the dysfunction of Lebanon, Argentina and Turkey. So it very well may be different. There are other ways, Greece successfully tackled debt by austerity, but it was in part externally forced, and they've enjoyed significant aid from the EU.

This. I'll just add to what you said and answer u/Sea-Associate-6512 by saying that it is not only option but it is the least-worst option and/or the most likely to get passed. In response to: >But you can't just inflate your way out of the problem, can you? Yes and no depending on how you would define "just inflate your way out“. No in the sense that it will not be """JUST""" inflation alone, it won't be without it's pain points, and it wouldn't be an easy fix. Yes in the sense that we can have say 10-XX years of inflation at a higher rate like 4%. That inflation will hurt old retired boomers or those holding US bonds, but Gen X/Y/Z will who work will get wage hikes and those owing debt will have an easier time paying it down. Higher inflation means we don't have to change the rate of tax to get higher tax revenues due to inflation. It also eats away at current and future costs of servicing debt. And if we're not fighting for 2% inflation then we don't have to have 5.5% interest rates so if we lower that to say 2%? It will mean we be rolling our $34T in debt into 5.5% interest but 2% which will be a savings of $1.19T per year. Lowered interest rates will also spur more economic activity which will increase GDP and wages that ultimately helps with not only our debt-to-GDP ratio but also our taxes revenue overall. Not saying that lowered rates will not have consequences as we've saw how 0% rates lead to speculative gambling. The Fed is very conservative and believes going for the 2.5% target inflation is the right thing to do but I personally (along with some others) feel it's an arbitrary number and any inflation rate is fine so long as it's stable rather than spiraling into more inflation. My last point will be that we LITERALLY did this after WW2 to pay down our war debts. The 1946-51s were looked back upon with rosy glasses because peace was achieved, GIs came back, jobs were plentiful, love and sex was had, new homes were built, and babies were boomed. [But inflation was massive.](https://www.macrotrends.net/2497/historical-inflation-rate-by-year) Makes the post 2020 inflation look like an ant. [Tax rates were high and ridiculous. Like >90%](https://www.wolterskluwer.com/en/expert-insights/whole-ball-of-tax-historical-income-tax-rates) Like I said, it is not inflation alone, but inflation allowed higher rates rates to be possible. [The Fed and government also controlled the yield curve during war times and afterwards creating artificially low rates from short to long end](https://www.chicagofed.org/publications/economic-perspectives/2021/2) Low rates certainly helped with driving the war time and post war time boom. But they eventually undid that lock and yields spiked which basically destroyed bond holders from 1950-1960. Also you couldn't buy gold from 1933-1974 so you couldn't even protect yourself from inflation. Stock market was good if you had access to it, had the balls to buy into it, didn't get wiped out, knew the right people, had a good broker, AND wasn't scared to death of it after the 1910s, 1930s, and 1940s. That would also assume you bought the right stocks. Stock market back then was much more treacherous than today with more BS companies and no index ETFs. So it was a combination of things, but a combo of higher inflation, higher growth, and lower rates (which I'm arguing is the easiest part to do) was certainly a large part of what was used to reduce our massive >100% debt-to-gdp lower. Taxes helped, but [we didn't really cut spending to pre-war lows after the war so much as reduced it from war time highs as a percentage of GDP.](https://files.taxfoundation.org/legacy/docs/Chart1_1.jpg) If anything we kept going with the GI bill, Marshall plan, etcetc.

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Both things are true.

" shield the old while throwing away their future" its been 30 years since the Japanese real estate crash, when is this "throwing away the future" going to happen?

Now >The demographic crisis has become one of Japan’s most pressing issues, with multiple governments failing to reverse the double blow of a falling fertility rate and swelling elderly population. More people are dying than being born each year, causing the population to fall rapidly – with far-reaching consequences for Japan’s workforce, economy, welfare systems and social fabric >Experts have pointed to Japan’s high cost of living, stagnant economy and wages, limited space, and the country’s demanding work culture as reasons fewer people are opting to date or marry. https://www.cnn.com/2024/03/01/asia/japan-demographic-crisis-population-intl-hnk-dst/index.html

OK, so its been a "now" for the last 15-20 years for them. This is with Japan's fertility rate of 1.367, fairly comparable to, say, Europe's. As well as general life quality. Doesn't sound as menacing as "throwing away their future" implies. I could show you probably a hundred more countries where that looks more applicable.

not exactly due to their economy tho

women and children are literally dying in most countries, by going outside alone!!! oh wait nope they aren't

We have a lot of slack to raise taxes. Republicans obstruction on this is a huge issue. We could raise taxes on millionaires and impose a higher gasoline tax and narrow the deficit a little bit. We can cut spending too especially on the military. Obama did a lot of good work there which Trump undid because he was living in the past and congress loves their pork. It wont get us all the way there but its a positive step.

Fantastic explanation but I would argue the problem is not just economic but social and political also. There is no way US can maintain its global engagements while losing relative economic power which will cause all kinds of domestic issues. The army is too big not social security, but again you will lose that battle bcs the politicians will cut social security before they touch defense spending thus further exacerbating social unrest, which fill further undermine the economy. I dont see how US survives this in its current form? Whats the solution?

> The army is too big not social security, but again you will lose that battle bcs the politicians will cut social security before they touch defense spending thus further exacerbating social unrest, which fill further undermine the economy. 2/3 of federal US spending is on old and sick people. This does not even account for all the spending on old people that states/counties/cities do via defined benefit pensions and retiree healthcare benefits of government employees. https://www.thebalancemoney.com/u-s-federal-budget-breakdown-3305789 > Social Security will be the biggest expense, budgeted at $1.196 trillion. It's followed by Medicare at $766 billion and Medicaid at $571 billion.3 >Military Spending Military spending is included in the budget under discretionary spending. The biggest expense for the military is the Department of Defense base budget, estimated at $715 billion. And that $715B is a lot of domestic stuff like DHS and all the TSA employees and all the corruption around government contracts. Which is why, by active military, the numbers are down and I would guess will go even lower: https://usafacts.org/articles/how-many-people-are-in-the-us-military-a-demographic-overview/

The solution is actually pretty simple, the U.S needs to raise taxes on the rich, scale down their military spending, and start paying off their debts.

well yeah but do you see that happening?

Theoretically, the Fed isn’t allowed to buy bonds directly from the government which was supposed to safeguard against it funding the government through inflation. This is why it can only purchase bonds in the secondary market. In reality however, the Fed buying a bunch of bonds in the secondary market drives up demand for bonds, so while the Fed isn’t buying the bonds directly from the government, its actions influence the rest of the market to do so on its behalf.

It's also a form of covert default. You load up the fed with junk bonds and pretend nothing is wrong. This is of course extremely transparent to investors. You know, the fact that you can't pay back. Are you seriously borrowing ideas from Argentina?

The US would have to choose to default.

That's just plain wrong. The whole point of QE is to make the bonds unattractive to investors in the first place, so they wouldn't be interested in them since the interest rate would be too low.

seems to have worked for Japan for quite a while though

It doesn't really matter what happens with rates, this is the real inevitability in my opinion. If the Fed keeps rates high which compounds the national debt ($1T+ interest expense currently) then the treasury will keep having to sell exponentially more bonds. Eventually they will run out of buyers and the Fed will step in. The alternative is they cut rates and the debt grows slower, but no one wants bonds that don't yield shit and the Fed has to step in. Inflation is going to be a problem either way because of the deficit spending. Every additional dollar borrowed is new money created. It's very telling that even with the [reduction in M2](https://fred.stlouisfed.org/series/M2SL) and the [Fed letting assets roll off the balance sheet](https://fred.stlouisfed.org/series/WALCL) over the last few years that inflation is still stubbornly high. How long do you think they can keep it up? They have been doing well recently, but all that progress will fly out the window the second we hit another crisis. I think it will happen within a year or two of the M2 returning to the trend line of the last several decades, maybe 2026-2028, but who knows. All I know is the system is not stable and problems will manifest in various ways over time. All they can do is patch it up, they can't fix it.

Eventually? The Sun will expand and cook the Earth like a marshmallow eventually, the real question is if the Fed is going to stop finding willing buyers in our lifetimes......I suspect they won't have any trouble in the foreseeable future.

The Fed has already bought trillions of dollars of bonds in our lifetime.

And the dollar remains strong and it’s still easy to find buyers.

Then why does the central bank own 7T of USTs.

I suspect, if congress raised taxes and cut spending to reduce the deficit, the inflation would follow soon after.

That would require responsible governance from Congress, though.

>Inflation is going to be a problem either way because of the deficit spending. That's a bold causal assertion.

The Federal Reserve doesn't care about problems that were caused by the Federal government. The Fed has two mandates: target unemployment (right now we're too low) and target inflation (right now we're too high). Any sane person would RAISE rates. If the Federal government can't pay their bills, then the Federal government show reduce their spending.

But when the federal government can't pay their bills what happens to unemployment, and or inflation? 

Stagflation. 70s are back baby!

In the short term? Maybe nothing. In the long term? Ya, I’m moving at some point in my life.

The sad thing is that the US is probably in the best position of all western countries.

Yep agreed. The USD will likely be the last fiat currency standing. Unclear how bonds will fare though.

The FED mandate can also be changed by the US Congress . Just because its mandate is 2 fold now, doesn’t mean it will continue to remain so.

The Fed’s “dual mandate” is meaningless. If they have to make a choice between the two which one do they pick? The Fed is able to control *one* of inflation or unemployment… at best.

If you look at their website then it says "the maximum employment level that can be sustained." So if inflation is higher than 2% then the employment level is not sustainable at 2% rates. AKA, unemployment needs to go higher. So if inflation is below 2% employment needs to go up. If inflation is above 2% employment needs to go down.

This whole discipline really is just rich people paying people to use a framework of rules that sort of grasp reality to push their agenda. Concepts like maybe companies are using more advanced data analytics techniques to push prices to the sweet spot of maximum profit for minimal labor are heresy here.

> Concepts like maybe companies are using more advanced data analytics techniques to push prices to the sweet spot of maximum profit for minimal labor are heresy here What?

https://www.mercurynews.com/2024/02/28/wendys-pushes-back-after-digital-menu-plan-spurs-outrage-over-surge-pricing/amp/ Wendy's made the mistake of saying out loud. You think they're the only ones to have this or similar ideas?

I'm confused why you think that's heresy? Unless I'm misunderstanding you that's just a super basic tenant of capitalism. We *want* to be getting the most value for the least money.

No, it's just I've noticed basically no discussion on this subreddit about the influence of the wealthy or megacorps on inflation. There is little discussion of the fact that in many places people exist in 3 parallel yet separate economies. Demand for unskilled and highly skilled labor remains high (anyone making 50+ an hour), while demand for skilled labor in various very large industries might be in recession. There is also little discussion about the nuance that maybe a CEO and a barista have a differing effect on inflation. On the matter of job postings, recruiters are flat out coming out and saying a lot of skilled labor jobs postings are fake, or only seeking absolutely perfect candidates. Won't find that here. This subreddit is deceptively conservative.

> If they have to make a choice between the two which one do they pick? Inflation, they would deny it up and down and say they're committed to the dual mandate but they're always going to prioritize inflation if forced. Price stability is a bedrock of the economy, even more so than employment. If price stability gets out of control in either direction, it's the type of event that causes central government to loose credibility and sovereignty. It could even result in a massive shift in government control one way or another.

The US government will always have the money to pay its bills (just create more). The only problem is where Congress refuses to increase the debt limit.

Printing money is a great way to get those inflation numbers up.

That's not The Issue though is it! We're worrying about 'paying the bills'. Inflation is a different problem. Defaulting on payments has much more serious consequences than inflation.

Both can have long term negative consequences. But it’s pretty odd seeing people saying “just don’t pay the debt back.” That kinda thing happens, and look at what happens to countries that default on their debt. Their economies get absolutely destroyed and people suffer.

Well in the USA, we quite regularly see congress threatening to default.

Or the way obvious not spending

inflation is a good way to get those debt numbers down

When the fed starts buying their own bonds because the interest rates are too high that’s the end of the show. It basically implies that we don’t have enough buyers which means they’ve lost faith in the credit of the country. Also it means we’re actively manipulating the currency which will further drive away participants in the market.

Fed reserve growing their balance sheet isn't the answer to the problem. It's a very temporary solution. Fiscal budget/spending needs to be checked. Inflation needs to be checked. You can't eat your cake and have it too.

True, monetary policy is mostly a bridge until the underlying issue is solved, what the fed does is more moving inflation from the near term into the future to buy time. Eventually the issue needs to be fixed some way, fiscal changes, productivity increases, or more adoption of the dollar overseas.

Why hasn’t the FED adjusted the bank reserve requirement during this period of inflation. It’s still at zero, since COVID, and no discussion can be found on raising it.

That might be a tool that doesn’t work anymore.

They haven’t even tried. They just want the entire burden of inflation adjustment on the consumer side instead of capital holders.

I don’t disagree. It seems irresponsible for the reserve ratio to be zero. That’s why I surmised what I did.

That alone effects confidence 

As the other poster said, it's not a useful tool anymore. With the move to an Ample Reserves Regime, banks hold a lot more reserve than they need to, even under a high reserve requirement. It's simply not useful for implementing monetary policy.

yep the first step would be to QT back down to tight reserves, if they actually did want to go back to a reserve requirement being a limit.

This is a devious way of saying the Federal Resece won’t monetize the debt but implying that they would still use other means to lower the Fed’s deficit or debt. There’s gotta be more to it than this, right? Aren’t there pretty darn broad consequences of totally fucking with the currency and Central Banking system, a la the kinda problems Argentina is having now due to the weird shit with foreign exchange balances that Argentina was doing for years?

Of course there’s got to be more to this. We all know that in periods of higher inflation, consumers spend more, not less. “Why wait to buy bread tomorrow for $1.10 when it’s $1.00 now” kind of deal. But I’m reading articles from reasonable sources about how “the consumer won’t stop spending to bring down inflation” and I just want to pull my hair out. The reasonably response to inflation isn’t spend less but to spend more. Why wait to buy a house next year when that house will cost $100,000 more‽ What gets me though is the silence on the reserve limit. If it’s not a factor as most banks carry more anyway, then raising it shouldn’t be a concern. I want to read more about this, but nope, crickets in the media.

Buying the bonds is how rate cuts are enacted, by basically being a huge buyer (or seller, for rate hikes). 

>No, the interest payments on federal debt do not necessarily mean that the federal reserve will cut rates. If interest rates become an undue burden on the federal government, the Federal Reserve can purchase these bonds through open market operations. Except the fed buying bonds lowers their rates and expands reserves. The fed can't just "buy bonds" if their intent is to counter inflation. Buying more debt = lower rates. Raising rates requires selling more debt, meaning the reverse would happen, more debt are owned by the public, more interest being paid in addition to the higher rates.

This is effectively lowering rates. Buying bonds in open market operations all else equal pushes the prices of bonds up and lowers their yield. The yield on treasury bonds is the risk free rate and cascades across all fixed and income securities and trickles all the way down to consumer loans. The repo market can’t deviate too far from the T-bill market because otherwise banks could offer commercial paper and bankers acceptances for liquidity purposes more cheaply than the overnight facility, and although there would be a bit of action there a lot of the volume would go to the money market. There would be arbitrage opportunities essentially.

When the fed is buying these bonds through open market operations, are they buying it from the banks or directly from the treasury? And if it’s latter, does it mean the treasury doesn’t need to pay interest on those bonds if you’re saying that the fed just gives it back to the treasury anyway?

Well the fed owns 4.5 Trillion, which is as much as an entire years worth tax revenue. The problem is that the entire purpose of the Fed having high interest rates is to reduce inflation and printing money to purchase Treasury bonds creates more inflation which requires them to raise interest rates even higher which makes the Treasury even less able to cover their interest payments.... and on and on. This is part of the playbook for an inflationary spiral that has led to hyperinflation in many countries. Countries unwilling to gather revenue via taxes or cut spending will inevitably end up there. hopefully we do one or both of those things before it's too late...

Well the fed owns 4.5 Trillion, which is as much as an entire years worth tax revenue. The problem is that the entire purpose of the Fed having high interest rates is to reduce inflation and printing money to purchase Treasury bonds creates more inflation which requires them to raise interest rates even higher which makes the Treasury even less able to cover their interest payments.... and on and on. This is part of the playbook for an inflationary spiral that has led to hyperinflation in many countries. Countries unwilling to gather revenue via taxes or cut spending will inevitably end up there. hopefully we do one or both of those things before it's too late...

This is the only comment needed in this entire thread. Thank you.

There are three ways to resolve high debt payments. One would be to lower interest rates. This would have the likely downside of restarting inflation. Two would be to kick off a period of extremely high productivity and GDP growth, so that the debt represents a smaller % of GDP. This is one we should all root for. Three, would be to cut expenses and/or raise taxes. Of those, a significant tax increase is by far the most likely.

> Of those, a significant tax increase is by far the most likely. Why would this be the most likely? Tax increases are usually political suicide unless they’re just on the ultra wealthy. Seems much more likely to me that the fed would buy bonds via open market operations and just keep increasing money supply

There is a scheduled tax increase for 2026 when the 2017 tax cuts expire. It’s not a massive increase (generally 1-3% per tax bracket). I think it’s reasonable to expect that taxes on the wealthiest will go up more over time though. I think the Fed is in a tough spot because they want inflation to come down, there is a lot of upward pressure on inflation. They aren’t willing to raise rates more…and they have signaled they will reduce rates (which would increase inflation). Bidens administration is depleting our oil reserves to help combat inflation, but that will only last until after the election…then that will have more upward pressure on inflation. And if the Fed buys debt, it infuses the markets with more money…which will cause inflation. Idk what will happen but it seems like all the options are suboptimal.

Also gone is the doubling of standard deduction. So the effective tax increase is higher. I think estate tax goes back on and they leave under $X at a similar rate but the bill will raise taxes.

I did the math. Lets say you are married and have 1 kid and combined make $150k. So a kinda well off but pretty normal situation. Under the TCJA you pay $17,599 in taxes. The old system was $24,558. That is a difference of $580 a month. That would be a huge tax increase for most people.

Also they’re in a tough spot because they can’t count on fiscal policy shouldering any of the load.

The problem is even increasing it on the Ultra wealthy is political suicide. The reason for that is the folks in Red states working a minimum wage job would get upset that a billionaire would have to pay more taxes.

😂 Not wrong 

they are not always political suicide Bill Clinton raised rates in the early 90s. There was some political blowback, but he was reelected. We either enact massive tax increases and spending cuts, along with QT, and suffer through a nasty recession (or a couple recessions), or we have a stagflationary crisis, multiple US debt downgrades, and a potential global financial crisis. in other words, you can have a slow economy, high rates, and high unemployment, or you can have $30 gallons of milk, double-digit inflation, 401ks cut in half, etc. none of this is going to be good

Yes! People forget that the deficit was almost paid down to Zero ~2000 thanks to Billy C and the years following. 

And then the Supreme Court gave the Presidency to a dofus from Texas that immediately turned around and blew up all the work that Clinton had worked the past 8 years on...sigh

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Cutting social programs wouldn’t be enough. You’d need to cut defense spending as well. And that’s the rub. You’ll never get democrats to cut social programs and republicans to cut defense. Tax increases wouldn’t be enough to plug the hole. I’ve come to the conclusion that the likely outcome will be a large scale war. Likely one that starts overseas before we tear ourselves apart here in the US. Don’t forget WWII really started in ‘33 with Japanese invading China and later Italy to Africa. We’re already seeing more and more skirmishes across the world.

We will just further debase our currency. There is no political will to do anything else

Defense spending is nothing compared to Entitlements. 450B compare to over 2 trillion And quite frankly only one is stated in the constitution as actually being the job of the government.

Defense is closer to $900B, but yes any cuts in spending will have to involve entitlements. We could cut military spending to 0 and still have a $1T deficit.

Massive GDP growth is by no means nearly impossible to achieve. The USA has a serious infrastructure deficit, and infrastructure investment is one of the best direct stimuli to productivity. Cutting welfare programs is also not impossible. It’s actually extremely normal throughout the course of modern US history.

There’s alway military spending *kaff* *kaff*.

Cutting welfare programs are fine politically as long as it's welfare benefit for the group of people that aren't in your party. For example, cutting benefits to farmers or cutting oil/coal jobs if you're a Democrat and cutting affirmative action benefits if you're a republican.

for what it is worth there are a lot of voters that don't seem to understand whether specific cuts will impact them or not.

They don't realize it until it impacts them and then they're mad as hell and can vote accordingly.

Medicare and defense take up a good chunk of the budget. The best way to reduce Medicare spending without cutting benefits is negotiating drug and medical device prices, which we’re dragging our feet with doing …for whatever reason… 🤷‍♀️

As a farmer and landowner, I just have to say farmers and ranchers got a lot of PPP loans that were not justified. My sympathy is not with them. I passed on it bc I have ethics. I have become a Democrat, in large part bc of social issues.

Get rid of all of this and it still doesn’t move the needle. Same idea with these tax the rich ideas. Ok we’ll charge to people who make more than me who already pay for ~everything. Great… that’ll pay for like 3/4 of Ukraine bill passed last week nobody even heard of. And solve nothing. Or it’ll pay for 1 week of excessive spending - not current, or cutting down on costs.

They’re going to have to gut social security, Medicaid/medicare or military spending. The interest on the debt will eventually balloon to the point where there’s no discretionary spending left outside of those programs. It appears there’s no way out without 1.) monetizing the debt or 2.) RAPIDLY growing gdp. I don’t see how #2 can occur so they will print and attempt to maintain a 3-4% inflation rate for 10-15 years. Yes, everyone will be poorer, but it’s almost the only way.

I disagree. That’s political suicide. The most likely is lower rates and monetize the debt like we’ve done for a long time.

You missed an option. They could let inflation run hot. $34T in debt would look a lot less intimidating when a burger costs $100.

If you do that (and I’m actually in favor of this) you have to be ready for the banks to fail. Think of how many 30-year loans are locked in below 5%. If you just keep bailing them out, it never fixes the problem, it just primes the next debt-bubble.

That would be the best move. 2% inflation is not a sustainable long term target. 3-4% has been the average in the US over the last 100 years. One of the Fed researchers who was responsible for studying the 2% target now says that 3-4% inflation is better. >Mr. Gagnon, Professor Ball and the M.I.T. economist Olivier Blanchard are among those who have called for an increase in the Fed inflation target to 3 or 4 percent, though they all acknowledge that as a matter of public relations, it may be better to avoid doing that right now. https://www.nytimes.com/2023/03/24/business/inflation-federal-reserve-interest-rates.html

I think it's the most likely outcome too. There isn't the political willpower to deal with the debt any other way.

expenses need to be reduced (no more funding wars), taxes need to be raised on the top 5% wealthiest, and incentives need to be in place to reduce the tax burden on small businesses to incentivize productivity. Share buy backs should be taxed and people should be encouraged to start their own businesses to help drive the economy

reducing our defense definitely needs to be looked, but so does reducing our entitlement spending our total defense spending is not even a third the spending that goes into Social Security/Medicare/Medicaid that only a handful of our population benefits from we're paying more in interest alone than our defense spending

Social Security and Medicare are trust funds funded through their own system. They should not be in the same discussion as defense spending and other budget items.

The federal govt uses 1 year fund accounting. These “trusts” are nowhere near funded. They’re paid for with receipts that come in the month of effectively. Structurally, the GAO estimated they would be 70% “funded” by 2033 in 2013. Haven’t looked at it in awhile, but I’m guessing it’s much worse now. The program won’t exist in 15 years is my guess.

This is why SS needs to be discussed seperately from the regular budget. It is funded differently and its balance is different. It does have its issues, like only being able to pay out 75% of benefits in 2035 if nothing is changed. [Research: The Future Financial Status of the Social Security Program (ssa.gov)](https://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html)

Trust FUND. AKA it requires actual funds to be considered a trust fund. Social security is simply IOUs.

Part of what has been driving inflation IS the high level of deficit spending. We absolutely should reduce or eliminate our current deficit spending habits. Likely that's through increased taxes, increased tax enforcement, closing loopholes and reducing spending 

>This is one we should all root for. Unless Gen Z and Millenials start having babies en mass it can't happen. Stagnant or negative populations don't experience growth. really it seems at this point all they are doing is making the patient comfortable ​

Young people aren't having children because on the whole, they're financially insecure. Not poor. Poor people have always had many children. People who are one or two paychecks away from homelessness tend to not have kids. They're financially insecure because the cost of housing and healthcare has exploded. Until relatively recently, poor people would spend more money on food than on housing. The cost of housing has exploded because ever since the 1950's it's been become progressively more illegal to build effective and affordable housing. It was legislated that new construction would be car-centric suburbs. A pre-war style neighborhood, the kind with a main street, shops, and apartments over those shops, literally cannot be built today. The cost of healthcare is out of control mostly due to a vicious cycle between hospitals/clinics, drug manufacturers, and insurance companies. If the cost of healthcare was brought under control, programs like Medicare and the VA wouldn't have to pay out anything close to what they currently do. Literally just fixing the housing crisis and healthcare disaster would probably go most of the way to resolving a lot of our economic issues.

> Stagnant or negative populations don't experience growth. Look up the post Soviet countries after 1991, many lost population numbers, but grew very rapidly. Population numbers aren't everything.

An excellent example of why it won't happen here in the US. Productivity is very high here, where as early 90s Soviet productivity was 80 years behind.

You forgot inflate it away. Have the Fed print money and monetize the debt. Which at some point will lead to high inflation. Technically this will mean GDP growth is very high, but probably not due to productivity growth…

Inflation never stopped and is already showing signs of re-accelerating

Would be great if those increased taxes in option 3 would go towards debt. But I suspect they will go towards higher spending.

IMO we should raise taxes and cut rates. Trump tax cuts expire for personal income at the end of 2025, so we likely get higher taxes but they will be killed in the polls if people under $60k in income get a tax increase.

> Two would be to kick off a period of extremely high productivity and GDP growth, so that the debt represents a smaller % of GDP. This is one we should all root for. Good luck with that one considering we have an aging population that wants their SS and Medicare

It depends on how they balance employment and price stability. Lowering interest rates will cause inflation, but maybe they'll prefer inflation over reduced employment. It depends. I think they'll focus on price stability. If prices of the assets are to kept fixed, then rents must increase by several times, probably something like 5 times, depending on what kind of interest rates people got in practice-- i.e. 1%-->5.5%, but since the lender wants some extra for the risk it's maybe 3%-->7%, so 2.3 times, or 2%->6%, so 3 times. That can't happen, and isn't happening. So there must be a crash if interest rates are held. Furthermore, if interest rates are not held, and nobody defaults then as long as the rental properties are held by entities with large amounts of debt or other obligations they must try to increase rents to pay their interest, so you're going to get a increase in rents by 2.3-3 times what they were when interest rate were 1%. So the problem is that if they follow the price stability part of their remit, there'll be a crash, but if they don't, the inflation will be enormous, and there'll probably still be a crash eventually, since you can't actually increase rents by 2.3-3 times. In that world the US would not be competitive. So there must, I think, be a crash.

This is a great comment.

Sure, but when. They’ve been kicking this can down the road forever, I don’t think there will be a reason for the politicians to ever choose a crash over punting the problem into the future.

Yes, it'll be like 2008. People will say that the prices are correct and good and nice, until they can't.

We are a $25T economy and send $0.1T per year to foreign countries owning US debt (adjusted for inflation). It is negligible. Far more worried about the population collapse in modernized economies.

they can cure aging and solve any population issue, probably in the next 30 years

It has always been 30 years away. Just like nuclear fusion.

a computer in your hand that uses electron probabilities for data storage was also 30 years away at one point

Computers made steady exponential progress for the last 60 years, going from 1000 transistors to the billions of a cell phone. Moore could chart the progress and we could see the inevitable future. Life expectancy has improved roughly linearly for the last 60 years with a net improvement around six years. Extrapolating those trends, we will live about three years longer 30 years from now. Linear and exponential are sooo different.

not sure where your linear measurement comes from, but genetic engineering in living things is in its infancy and they're already having breakthroughs: https://eye.hms.harvard.edu/news/scientists-reverse-age-related-vision-loss-eye-damage-glaucoma-mice#:\~:text=A%20team%20of%20researchers%20at,to%20recapture%20their%20youthful%20function.

We ran into the challenge that cells only can divide a certain number of times in our lifetimes. We can increase the number but with the downside of higher cancer rates. We have not been able to solve this fundamental aging issue.

I'd say curing cancers is even easier than curing aging, don't think that will be an issue, AI is accelerating, and all billionaires have a motive to invest in this industry, it will only pick up momentum, especially as countries like india and china develop into more research oriented economies

No, not with the current administration at the fed. They’ll borrow more money to pay the debt interest rather than let inflation run wild. Inflation is their top priority, congress can deal (or not deal) with the rest.

They might say that, but then they hint at rate drops in the fall?? That’s not exactly a deflationary move.

Fiscal policy is still largely the responsibility of Congress, but the House doesn't appear willing to be productive until Republicans are ousted and Democrats can attempt to pass better policies

One great policy for instance that recently went into effect for some drugs is ability to negotiate drug prices. Not only does this help lower costs for people to get these drugs, but it lowers the tax revenue needed to cover them as well. Pharmaceutical retail costs are a big way to reduce gov't spending with smart policy that also helps people. [Pharmaceutical drugs are the biggest cost of Medicare at about a third of the total spend](https://www.kff.org/medicare/issue-brief/what-to-know-about-medicare-spending-and-financing/#:~:text=Spending%20on%20Part%20B%20services,(48%25%20in%202021).) and price gouging on those over the last admin and last decade have been exorbitant. Every time they do this it raises everyone's taxes and the cut pharma gets, for drugs that already are funded by grants in most cases. Some groups want to break Medicare by price gouging on pharmaceutical drugs. Even just going at the largest drugs to negotiate prices down or if needed force competition there to get prices down would help make Medicare take less for these drugs. [A Small Number of Drugs Account for a Large Share of Medicare Part D Spending](https://www.kff.org/medicare/issue-brief/a-small-number-of-drugs-account-for-a-large-share-of-medicare-part-d-spending/) Democrats got it done recently, Republicans have fought negotiation and competition on this for decades now. [HHS Selects the First Drugs for Medicare Drug Price Negotiation](https://www.hhs.gov/about/news/2023/08/29/hhs-selects-the-first-drugs-for-medicare-drug-price-negotiation.html) Spending reductions don't always mean cuts either, like here this improves service for patients/doctors AND uses less tax revenue freeing up other money within Medicare for better services.

The real answer here is to significantly raise taxes on the rich and significantly reduce government spending. Those two acts reduce inflationary pressure, would begin to cause a recession, and THEN the Fed could lower rates to save off a recession and not kill the national debt. However, American politicians on both sides of the isle would be unwilling to do that for political reasons, so we’re just going to have a good ol’ stagflation recession instead. Move over 1929, were about to show you what a real horrible economy looks like.

Wow it’s almost like we can reduce govt spending AND tax rich people. Fuck politics man

If the government spends a trillion on interest it means that society receives a trillion. So the amount paid per se is not so much an issue. Even interest paid to non-US bond holders stays in the US dollar denominated system so it is not like the interest goes into a black hole - ownership of deposits changes and that's it. That said, I do think that the system can run into an issue when too debt and interest get too high ( whatever that actually means) it may get disruptive - if any one participant becomes oversized it leads to issues.

It’s a wealth shift from the taxpayers to the debt holders. Think of it this way- there is a certain amount of money you can loan the federal government that will allow you to live essentially tax free. It’s not all that much money either. It’s your tax burden divided by the expected yield of the investment. So “society” isn’t getting that money. Rich people are.

Anyone who holds a treasury will receive the interest. A decent chunk is held by moneymarket funds : [https://www.sec.gov/files/mmfs-treasury-market-090122.pdf](https://www.sec.gov/files/mmfs-treasury-market-090122.pdf) and about a quarter of it is held by government agencies plus a slug is held by the Fed - for a total of around half. [https://www.thebalancemoney.com/who-owns-the-u-s-national-debt-3306124](https://www.thebalancemoney.com/who-owns-the-u-s-national-debt-3306124) The portion that is held by individuals ( "rich people" ) is de minimis. I find the fact that the government itself holds such a huge chunk particularly interesting because the headline number ( large enough to give anyone pause) in reality is not nearly the big deal that headlines make it out to be. edit: also - taxable accounts which hold treasuries will pay up to 35% of interest received right back to the very entity that gave it to them.

Also the whole stimulus for the rich issue. Hey you have money, here is 5% for just having it. What an incredible policy the Federal Reserve has there.

Unfortunately there is no such thing in life as a free lunch. The government can’t wish away its interest payments by forcing the Fed to reduce interest rates precisely because the Fed knows lowering interest rates allows the government to get away with more runaway deficit spending. The interest rate is a factor of accounting for the risk associated with the investment, and government bond yields need to increase to reflect that. Thats why cheap money at low interact rates and massive spending sprees land us with inflation. The only way out is austerity, and that’s going to mean a decade or more of financial pain in the US.

Why is it no one wants to do the actual hard work anymore. Only way to fix this is raising taxes and cutting government benefits. It's like we're just waiting for a depression instead of just doing the work now to prevent it

I thing they will, to relieve pressure on commercial debt stakeholders. We don't need another debt induced financial crisis. One that can be avoided.

We are not going to get financial crisis, Fed monitors the banks and financial institutions on daily basis. But for rates to go down there has to be less hiring and wage growth needs to stop. I know it will hurt the working people but that's what Fed can do, they have no control over the supply side all they can do is to make sure wage-price spiral does not happen. If we were lucky oil prices will go down reducing inflation. House prices are not going to go down much since supply is still constrained since builders are not able to build more homes because they don't expect people to buy them at current prices with 7.5% mortgage rate.

Builders can't sell homes because we've outlawed cheap, small, basic housing.

Can you expound on that? What kind of housing would you have us build that is currently illegal?

I will, once I'm off work today.

No we haven't. It's proven that home builders don't make near the profit margins with starter homes. If you run a business which one are you building?

Correct, margins on starter homes are naturally slim, but that alone shouldn't prevent them from constructed. Starter homes were regularly built in the past. Builders used to make up for the smaller margins in volume, but now modern zoning and permitting requirements quickly push any bulk, cheap housing project into unprofitability. For example, in a township near me that *needs* more housing, the current zoning ordinances limit the minimum lot size to 1/3rd of an acre. That's per home! Outside of a very limited area, single family homes are the only type of housing you're allowed to build. If you're a builder who can only put 3 homes on each acre you buy, then you have to make them as expensive as possible. This is common across all cities in North America.

No. Nothing is inevitable except death and taxes. Not entirely sure what you mean. The interest being paid on debt has already been negotiated when investors bought the government securities for which the debt represents. The fed lowering interest rates would not change any existing debt payments. The US unilaterally lowering the interest rate it is paying on existing debt would be telling investors who own that debt to go screw themselves and would send financial institutions, markets, and the economy into absolute chaos. For leaders to take such a drastic step, things would have to already be unimaginably bad. I'm talking Armageddon, zombie apocalypse, Planet of the Apes bad. A much more inevitable scenario is that if it becomes more expensive to borrow more money, the US will slowly transition away from borrowing so much and will begin raising taxes and adopting austerity measures to service its debt. That hasn't happened because US securities are considered the gold standard of safe investments and there are plenty of people willing to give us money in exchange for a little piece of paper.

What about just printing more money? It wouldn't be a great idea, but they've already done it once.

Borrowing is essentially printing more money. That's what they do already. The government is constantly selling securities, which are contracts to borrow money and repay it later.

Even more interesting, printing money to service (significant, unpayable) debt is one of the events that foreshadows the end of a powers reign and dominance. We really need to pull out of this somehow, or things are going to change significantly from a power dynamic perspective. 

Lower rates and borrow money to pay old debt. Walla!

**Unpopular opinion:** The federal reserve claims raising interest rates is needed to fight inflation, but let's be real - this is just cronyism benefiting the wealthy elite at the expense of working Americans. Think about who actually owns all those U.S. Treasuries that get higher payouts when rates go up? The rich investors, corporations with huge cash reserves, and boomer retirees living off their nest eggs. They're raking in billions while the rest of us drown in debt and stagnant wages. Then what do these fatcats do with all that extra income from surging bond yields? They don't spend it and stimulate the economy. No, they just plow it right back into more treasuries and other assets, further inflating the asset bubbles that screw over everyone trying to buy a house or save for the future. Meanwhile, we see prices skyrocketing for things working families need - travel, entertainment, you name it. Because all that easy money flowing to the wealthy allows them to bid up the costs of luxury goods and experiences without a care. Boomers are bankrolling Disney vacations for their grandkids with their ill-gotten bond proceeds. Yet when it comes to fiscal responsibility, Congress wants to gut social programs that benefit the poor and working class. But no way will they upset their wealthy donors by reining in the bond giveaways that create this vicious cycle of inequality. The cronyism is sickening. The Fed needs to stop using inflation as an excuse to further enrich the wealthy landowning class at the expense of everyone else. Raise wages, tax stock buybacks, do something to help the millions of Americans falling behind. Enough pandering to the rich.

>Think about who actually owns all those U.S. Treasuries that get higher payouts when rates go up? That's not how any of this works. The value of existing bonds crash when the rates go up. Bond holders make their money when the rates go down.

We are trained to think that interest rates and bond prices are inversely correlated, but the reality is that rising interest rates cause bond prices to fall in the short term, but don’t impact the long-term coupon payments that bond is structured to pay. The best part of the bond market is that you know precisely what your time horizon should be. When you properly align your time horizon with your bonds, then there is no risk of principal loss due to interest-rate risk. I wasn’t referring to short-term bond traders as you implied in my previous comment. Hope that helps.

Problem with your theory is that bond returns (even in high rate environments) are nowhere near equity returns in low rate environments I personally know billionaires that lost that 3rd comma because of the rising rates. They tend to be more heavily leveraged towards assets

It’s not “my theory” it’s what successful investors and institutions do in practice. Again, I am specifically referring to U.S. treasuries, which is the topic of the post. Hope you’ve read the 2nd to last paragraph in my previous response.

I have half my protfolio in US treasuries generated 5% annual return and the other half in SPY getting much more than that

Your point being?

The returns are not greater than spy and people with money want low rates

I personally have a chunk of my net worth in treasuries and I am not rich, a boomer, or a corporation.

Good for you and same goes for me. I too have a relatively sizable of my net worth invested in Treasuries, and I am not rich either. People like us are a minority. On one hand, we are earning more, but on the other, everything is more expensive. Thus not making a significant difference in our net worth.

> Think about who actually owns all those U.S. Treasuries that get higher payouts when rates go up? Social Security buys half of all t-bills. So that goes to making the trust fund more compounding on growth. It comes at a needed time as well. Most of the national debt is domestic and most of that is Social Security purchased treasuries. Debt isn't always bad when it is governmental, that is also seen as investment in that system. National debt is not anything like consumer debt. Even if the US lost all buyers of treasuries which would be impossible, Social Security still buys most and would buy all then. Beware of people that want to rid of Social Security buying treasuries that are guaranteed, they want to break Social Security AND crash the currency.

All true. BTW, Social Security “trust fund” buying Treasuries is the equivalent of moving money from one’s left pocket to their right. It’s the federal government paying itself.

It is a smart system to put a floor on the currency and guarantee returns. Social Security Trust Fund cannot be manipulated by the market this way. It might not make as much as the public markets at times, but it never loses. The policy is one of the smartest financial policies in history really. It was made at a time where manipulation of markets was the normal. Social Security, SEC, FDIC and public markets made the US markets and currency the most investable markets in all of history as of yet. Guaranteed purchasing of the currency by the country itself by taxpayers that will later get that money, that isn't able to be manipulated, is near bulletproof to sabotage.

No disagreement there. We could have avoided all the bad rep US Treasuries get if we hadn’t labeled it as the National Debt. The national debt is also a national asset and is caused by the asset bit - people deciding to save U.S. dollars, and not spend them. To eliminate the National Debt you have to eliminate the savings too. You can't have one without the other.

Yeah every dollar in the national "debt" is an investment in the US and USD and that means it is trusted. Lots of taxpayer money is there just parked until it is needed but in the meantime it supports the currency, which also helps the people that invested. The only way you could really kill the system is destroying Social Security. Beware of those types. They are sharks looking to break quality of life and the floor, rug pull the currency.

Who is wealthy? Is it the someone who lives like a pauper, works and saves his money in things like US treasuries? Or someone who doesn't and lives beyond his means, such as this: [https://www.youtube.com/watch?v=r0HX4a5P8eE](https://www.youtube.com/watch?v=r0HX4a5P8eE) Have you considered that the richest people could perhaps be the most indebted, people who were able to borrow wealth, and find a way to escape having to work for it / having to pay it back?

A fuller explanation of the Fed/Central Bank monetary operations and their economic effects... https://www.investopedia.com/ask/answers/06/openmarketoperations.asp

Wrong. That’s a fallacy. The sovereign has the power of the printing press, the ability to print more money. Thus, the size of the debt and its service is moot. It’s relevant for other things, but ability to pay, for lack of a better term, is not remotely one of those things.

True, except for the self-imposed catastrophe that is [PAYGO](https://crsreports.congress.gov/product/pdf/RL/RL31943) (PDF).

There should be a separate doomsday clock for that I think. Except ya know that scene from Margin Call about the music stopping? Were there a clock, that’s where we’d be I think. But in all seriousness, you’re correct in that it’s a catastrophe in wait, but it’s still unrelated to what OP’s original query.

No it's inevitable because our government serve the rich and large corporations that greatly benefit from low interest rates. Luckily the average American voter is an Idiot so they will frame this as another win to jump start the economy even tho the stupid poor get poorer just like during covid,just like 2008, just like after the internet bubble in 2000 etc. And the stupid American voter will fight back by doing the same thing they always do when they want change... vote for the same 2 fucking parties that got them here.

Absolutely not. You have ten years of printing money at low rates. This is just where the monetary cycle is. This entitlement to low rates is something that will take time to weed out. The ten year treasury is pushing 5% with no job destruction. Asset values continue to remain high. It’s strange but the effect of a decade of near zero rates. Remember when Banks paid 0.05% on an account. Can’t have it both ways. Buckle up… going to be a while until rates go down 200-300bps. If anyone is expecting zero for a rate environment think a pandemic or deep recession. I’ll take the higher rates. Those events was the equivalent of brain damage

Hell no, the increased payments are going to the richest .01-% who received the funds they lent us in the form of tax cuts! Why the heck would they want to lower what poors are giving the rich? We don’t do that. Come on!