Servicing the US Debt at Higher Rates

Anyone else concerned about how the US will have to pay substantially higher rates on its debt?  It is nearly 100% certain that our debt is going to be much more expensive to maintain.  I guess there are two ways to pay for it:  

  1. Issue more debt

  2. Raise taxes

We are not going to be doing option number 2, nor should we. We are going to have to issue more debt.  Most people had thought that carrying lots of debt was not a big deal but I wonder if those views will change as interest rates rise. 

Comments (30)

Jun 16, 2022 - 1:43pm
K-Peezy, what's your opinion? Comment below:

Honestly? Why bother with any concern since this topic has come up for how many decades now?

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Jun 16, 2022 - 1:47pm
financeabc, what's your opinion? Comment below:
K-Peezy

Honestly? Why bother with any concern since this topic has come up for how many decades now?

Well, we had close to 0 interest rates for at least 10 years and now we don't.

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Jun 16, 2022 - 2:13pm
BobTheBaker, what's your opinion? Comment below:

Reverse trump tax cuts. Raise capital gains taxes on the wealthy. get rid of corporate tax loopholes. Cut military spending. Get rid of most corporate subsidies. Actually attempt to tackle healthcare costs to reduce cost of Medicare/Medicaid.

Array

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Jun 16, 2022 - 3:06pm
financeabc, what's your opinion? Comment below:
BobTheBaker

Reverse trump tax cuts. Raise capital gains taxes on the wealthy. get rid of corporate tax loopholes. Cut military spending. Get rid of most corporate subsidies. Actually attempt to tackle healthcare costs to reduce cost of Medicare/Medicaid.

The Trump tax cuts were incredibly irresponsible but you should not raise taxes in a declining economy.  I would be very hesitant to cut spending at the moment.

Jun 16, 2022 - 6:31pm
BobTheBaker, what's your opinion? Comment below:
financeabc
BobTheBaker

Reverse trump tax cuts. Raise capital gains taxes on the wealthy. get rid of corporate tax loopholes. Cut military spending. Get rid of most corporate subsidies. Actually attempt to tackle healthcare costs to reduce cost of Medicare/Medicaid.

The Trump tax cuts were incredibly irresponsible but you should not raise taxes in a declining economy.  I would be very hesitant to cut spending at the moment.

This was more of a long term thought rather than an immediate one. Not much can be really done immediately.

Array

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Jun 16, 2022 - 3:16pm
MonkeyNoise, what's your opinion? Comment below:

Great to do right ahead of a recession and China/Russia challenging the global hegemony 

any other brilliant ideas?

Jun 16, 2022 - 10:12pm
Pierogi Equities, what's your opinion? Comment below:

BobTheBaker

Reverse trump tax cuts. Raise capital gains taxes on the wealthy. get rid of corporate tax loopholes.

this is purely for the sake of discussion, but can you legally donate money to the federal government? Can someone theoretically write a check out to the Treasury to be used to pay down the national debt?

Edit: no shit, you can. Learn something new every day:

  • https://www.treasurydirect.gov/govt/reports/pd/gift/gift.htm#:~:text=The%20Bureau%20of%20the%20Fiscal,debt%20held%20by%20the%20public.
  • https://www.pay.gov/public/form/start/23779454

Quant (ˈkwänt) n: An expert, someone who knows more and more about less and less until they know everything about nothing.

Jun 16, 2022 - 10:49pm
Memberberries, what's your opinion? Comment below:
BobTheBaker

Reverse trump tax cuts. Raise capital gains taxes on the wealthy. get rid of corporate tax loopholes. Cut military spending. Get rid of most corporate subsidies. Actually attempt to tackle healthcare costs to reduce cost of Medicare/Medicaid.

Raising capital gains taxes will probably reduce revenues to the government. If anything, we should cut capital gains and corporate income taxes to zero to encourage foreign investment and raise taxes across the board as half the nation pays absolutely nothing in income taxes today. We should cut discretionary spending 1% a year across the board until we balance the budget. 

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Jun 17, 2022 - 7:00am
financeabc, what's your opinion? Comment below:
Memberberries
BobTheBaker

Reverse trump tax cuts. Raise capital gains taxes on the wealthy. get rid of corporate tax loopholes. Cut military spending. Get rid of most corporate subsidies. Actually attempt to tackle healthcare costs to reduce cost of Medicare/Medicaid.

Raising capital gains taxes will probably reduce revenues to the government. If anything, we should cut capital gains and corporate income taxes to zero to encourage foreign investment and raise taxes across the board as half the nation pays absolutely nothing in income taxes today. We should cut discretionary spending 1% a year across the board until we balance the budget. 

The timing is not right to raise taxes across the board  Middle income people are already paying a lot more for good services because inflation is at a 40 high.  A higher tax rate would be painful for them. 

Jun 16, 2022 - 2:57pm
financeabc, what's your opinion? Comment below:

I think that is already happening but that is a good point.  However, wouldn't this action push rates even higher.  

Jun 17, 2022 - 6:53am
financeabc, what's your opinion? Comment below:

OwwMyFeelings

If you are buying your own debt rates go down, so no. But your currency will decline. This is happening in Japan right now where rates would be higher if the government weren't purchasing.

They are not going to be buying their own debt. They have announced plans NOT to reinvest proceeds from maturing issues, which will have the impact of reducing their holdings.

https://www.stlouisfed.org/open-vault/2022/may/how-will-fed-reduce-balance-sheet

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Jun 17, 2022 - 11:00am
Addinator, what's your opinion? Comment below:

Correct - they've got a 9 trillion dollar balance sheet that they doubled in two years, purchasing $120 billion A MONTH in treasury's and MBS. I think you posted a thread about the magnitude of bond losses, rate moves, etc. - beginning to take away the infinite bid, and reducing their balance sheet is one part of raising rates and largely pulling excess liquidity out of the system to slow rampant asset price appreciation. 

Large parts of Fed holdings are out the curve - you've got a bit over $1 trillion in treasuries (not counting repo facility) that are maturing in under a year. $2 trillion from 1-5 years, $4 trillion of mixed treasuries and MBS over 10 years. Add in the repo facility at a cool $2 trillion. It's going to take a while - unless you are a cynic like myself, where they are simply reducing to add again. 

Regardless - if the Fed isn't buying, it worsens the overall picture at this point. Now yellen is simply rolling over more and more debt at higher costs to the treasury. Despite claims of shrinking fiscal deficits, they still exist which necessitates rolling over whatever debt you have. To your point - it's a big issue. 

I doubt you'll see the Treasury rush to term out it's debt loads - the simplest answer is that once the Fed has raised to 'neutral', let's call it that magic 2.5%  number - they will be back in a position to begin cutting short term rates, and maybe start re-investing maturing proceeds back into the treasury & MBS market. These aren't stupid people - they know we can't run massive fiscal deficits, spend trillions on a whim without low interest rates financing it. Meh - I'm done now. Hopefully someone can tell me why I'm an idiot and this is all going to work out well in the long run. 

Jun 18, 2022 - 12:53pm
unknownmonkey37, what's your opinion? Comment below:

I feel like everyone is missing the point. The fed is raising rates in reaction to inflation, if inflation wasn't so rampant they wouldn't have to raise rates as quickly and this wouldn't be a topic. It's a simple statement obviously with a complex solution, but there are solutions that don't mean complete cutbacks or increasing of taxes (anyone who suggests this is an idiot and wants a recession).

Reduce agricultural subsidies, will lower government spending and reduce one of the lowest input costs into inflation… food. Small dent to deficit but big dent into inflation and one that helps Americans the quickest.

Reduce tariffs and duties across the board from non-China / Russia countries. We're sourcing the goods regardless. So many loop holes anyways, big corporations have found solutions that smaller companies can't avoid.

Get rid of minimum wage laws. Small dent, but this is more of a personal thing for me.

Reduce state and federal unemployment benefits, getting people back to work and increasing the labor supply. We've enjoyed years of low inflation because, honestly, wage stagnation. More people working will solve that.

Get rid of green energy regulations and all energy subsidies. LNG is the cheapest and cleanest near term fix for American energy needs. Encourage the US oil industry to get back to work. We enjoyed low oil prices because of the threat of strong US oil production caused OPEC to lower prices and crush them. I think Americans will be ok with that.

Reduce property taxes and encourage more landlord friendly laws, let people get kicked out of their apartments after 60 to 90 days. These seem counter intuitive but will lower rents in the long run particularly in CA and NY. This is less of a near term fix. Other fix is to change property taxes to a lot based size metric. Will encourage smaller lots and reduce tax burdens.

Jun 18, 2022 - 2:35pm
financeabc, what's your opinion? Comment below:
unknownmonkey37

I feel like everyone is missing the point. The fed is raising rates in reaction to inflation, if inflation wasn't so rampant they wouldn't have to raise rates as quickly and this wouldn't be a topic.

What are you talking about?   Everyone here knows the Fed is raising rates to reduce inflationWSO is not comprised of people who work for Walmart.

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Jun 18, 2022 - 2:11pm
Anonymous Monkey, what's your opinion? Comment below:

We need to end the irresponsible tax cuts in this country.  Not now, because we're at the height of a bear market, but when things start to recover.

In 2017, we added 1.7 TRILLION to the deficit for a tax cut that went almost entirely to stock buybacks.  World War 2 level of debt to GDP ratio.   No war, no crisis, nothing.  And then when an actual crisis came around and we needed to keep airlines, hotels, businesses, etc. alive we were completely unprepared.

The right's policy since the Reagan Era is huge tax cuts for the rich, huge hikes in military spending, and domestic spending stays the same (they depend on votes from seniors and the rural poor) and it is inherently unsustainable.  And since the Reagan Era, republicans have been spending like drunken sailors and Democrats have cleaned it up.  Hopefully Republicans will change their policies and pass tax cuts that benefit working people in a fiscally responsible way.  See:

 https://www.politifact.com/factchecks/2019/jul/29/tweets/republican-presidents-democrats-contribute-deficit/

Jun 18, 2022 - 2:40pm
financeabc, what's your opinion? Comment below:
Drumpfy

In 2017, we added 1.7 TRILLION to the deficit for a tax cut that went almost entirely to stock buybacks.  

Stock buy backs benefit executives at companies far more than they benefit other shareholders.  The tax cuts trickled up instead of down.

Jun 18, 2022 - 2:52pm
CollierV, what's your opinion? Comment below:

Maybe a dumb question, but why would the outstanding US debt be serviced at higher rates? Doesn´t it only affect new issuances? FUrthermore, the inflation rate is still way above the interest rate that the Gov pays, hence it favors them.

Jun 19, 2022 - 10:46am
financeabc, what's your opinion? Comment below:
CollierV

Maybe a dumb question, but why would the outstanding US debt be serviced at higher rates? Doesn´t it only affect new issuances? FUrthermore, the inflation rate is still way above the interest rate that the Gov pays, hence it favors them.

The first point is a good one.  The government, however, issues new debt continuously. As a result, our costs are going to rise.  I do not really understand the second point about inflation rate and interest rate

Jun 21, 2022 - 10:34am
Addinator, what's your opinion? Comment below:

On the first point, it's largely because we aren't reducing the  amount of debt. There's large portions - maybe 30% or so - of our publicly held debt that we have to roll over every single year. We don't term out our debt nearly as much as, well, maybe we should. It's part of the issue we've boxed ourselves into - when you run long term, structural fiscal deficits you are incentivized to keep rates artificially low as you need to roll over your debt continuously. Setting aside all of the other issues around the Fed buying our debt, etc. etc. 

On the Second - it's because in theory as inflations and deficits rise, you should see a long term debasement of your current through purchasing power. Those who borrow today and buy something lock that in, then pay back the lender with the devalued dollars over time. It's largely why you'd favor inflation vs. deflation. 

Jun 19, 2022 - 10:13am
guyfromct, what's your opinion? Comment below:

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