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Comment by JumpCrisscross | Hacker News Reader

> the Fed can't raise rates due to the high debt to GDP ratio we currently have and this would make the interest payments too high. Is there any truth to that?

No.

The Fed is raising rates. They raised rates yesterday. They say they intend to keep doing so through the end of the year. Net interest is a low single digit percent of the federal budget; it's lower as a fraction of GDP than it was in the 90s [1]. Most of the federal debt is fixed rate--raising rates now only affects future borrowing.

The real limit on rates is growth and employment. If the economy falters because people are spending all their money on servicing debts over goods and services, we'll see a crunch. That's not happening. The opposite is happening: inflation is surging.

[1] https://www.cbo.gov/publication/56910

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> The Fed is raising rates. They raised rates yesterday. They say they intend to keep doing so through the end of the year. Net interest is a low single digit percent of the federal budget; it's lower as a fraction of GDP than it was in the 90s [1]. Most of the federal debt is fixed rate--raising rates now only affects future borrowing.

I think the question is: can we sustain 5%+ interest rates? The answer is no - unless GDP increases precipitously or government spending declines A LOT.

Imagine 5% is the new norm. In 30 years, the government will have 100% of public debt at 5% interest. At 139% debt to GDP - that's 7% of GDP going to debt financing. Federal revenue is only ~18% of GDP.

That means 38% of taxes would go to debt financing. And if trends continue - within 30 years, public debt to GDP would likely be closer to 180%. So 50% of taxes would go to debt financing. It's simply not possible long term (unless there is some MASSIVE unknown boost to productivity to save us).

Interest rates might go up to 20% for a year here and there. Who knows. They'll be hovering around 0 or negative and steadily going lower for most of our lives - unless we reach the singularity.

> the question is can we sustain 5% interest rates. The answer is no - unless GDP increases precipitously or government spending declines A LOT

We can’t sustain 5% real interest rates. But nominal GDP, rates and tax take are inherently linked; if short-term rates are 5% for 30 years it’s because inflation and/or the economy are going gangbusters. That will drive up GDP and tax collection. Until it doesn’t. Then we have a recession and all those numbers go down.

This isn’t infinitely extensible. But we’re nowhere close to federal debt servicing being a constraint on the Fed or the Congress. Inflation, instead, remains the check.

> But we’re nowhere close to federal debt servicing being a constraint on the Fed or the Congress. Inflation, instead, remains the check.

Not a constraint in the SHORT TERM. Long term, it is absolutely a constraint. As I said, Interest rates can go up. But long-term trend will be hovering around the negatives (unless there's a MASSIVE boost to productivity).

> it is absolutely a constraint

For domestic-currency debt, no, it is not. Inflation and politics are always the constraint.

So you're saying you think it's possible we can have 5% interest rates and not a massive recession?

When you're in 350% public debt (state & local) to GDP - inflation is not a problem! It's a gift! A recession is the problem.

> you're saying you think it's possible we can have 5% interest rates and not a massive recession?

There would be a massive recession. (And/or inflation.) That's the point.

What is not possible is for the federal government to wind up in a situation where interest payments are dominating the budget, inflation is low, there is political will to service the debt, and yet magically the Congress can't appropriate the money. It can. It always can.

Federal debt servicing is not a constraint on rates per se. It's a constraint because it requires either debt monetization (inflation) or high rates (recession) which are politically difficult.

> inflation is not a problem

How did you interpret "inflation and politics are always the constraint" as "inflation is not a problem"?

That’s a bit of a straw man argument. Why would the Fed want 5% nominal rates for 30+ years?

Also, the Fed mostly thinks about output and rates in real terms when thinking about the long term.

> Why would the Fed want 5% nominal rates for 30+ years?

This is a strawman. I said nothing about the Fed wanting 5% rates.

I'm simply saying rates are not going to be higher for a LONG period of time because - if you look at the math - a sustained period of high interest rates with our current public debt to GDP means that public spending would have to fall dramatically (which would crush GDP in itself - a negative feedback loop).

Substitute 5 for any non-negative number, and you'll see that any number higher than 0 LONG TERM means a cut to public spending.

You multiply the increase by ~3.5x (to include effects from state & local governments) and then you multiply by ~4x (because taxes aren't 100% of GDP - their ~25%).

A 1% LONG TERM increase in interest rates means a ~14% reduction in public spending (with the same tax burden).

The US Federal Government is already spending about ~14% of GDP on SS, Medicare, Medicade, and Debt Service. Considering that our tax revenues is only ~17.6% of GDP. Good luck cutting spending by 14%. Let alone 2x or 3x that.

Ultimate it is the Fed’s decision though. But anyways your calculations make sense, but it all falls part if you don’t do them in real terms. Because in nominal terms, the solution to your equations is simply hyperinflation or start a new currency, a la Argentina.

You're making the mistake of considering these as independent variables and extending them to infinity assuming no one will respond to current state of the world in the future.

The only way the fed will keep rates at 5% for 30 years would be if we had a gangbusters overheating economy going full tilt with near zero unemployment for the entire time. In which case the GDP graph will be up and to the right the entire time. And in that scenario GDP (and thus tax income) will be rising faster than debt and interest payments rise.

Put that aside though and assume that we somehow end up in a situation where debt servicing is a huge chunk of the budget. There are tools to solve that problem. We can accept more immigrants and give more incentives for existing citizens to have kids to kickoff population growth. We can increase tax rates to payoff some of the debt. If you want to get esoteric the Treasury can mint coins and deposit them at the Fed - something the US Government does every year, creating brand new money out of nothing. Yes this would amount to some monetization of the debt but it is a possibility. All of these strategies and many more have pros and cons. Perhaps in reality we'd use a mix of many different strategies.

They can and are raising rates, but do you think it’s feasible for them to go full Volcker if that’s what it takes to beat back inflation? When I worry about the debt to GDP ratio, it’s not about whether we can withstand bumping from 0% to 1-2%, it’s whether we can withstand historically normal ranges, let alone what it took in the 80s.

> do you think it’s feasible for them to go full Volcker if that’s what it takes to beat back inflation?

"US inflation, which peaked at 14.8 percent in March 1980, fell below 3 percent by 1983...Volcker raised the federal funds rate, which had averaged 11.2% in 1979, to a peak of 20% in June 1981" [1]. For comparison, we're currently around 8.5% [2] and 0.75% to 1%, respectively. Long-term rates are below 4% [3].

There is no need to tip the economy into a recession at this time. If we needed to, the constraint would be--as it was in Volcker's time--political. If we were suffering double-digit inflation, I suspect the will would be there.

[1] https://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_the_F...

[2] https://fred.stlouisfed.org/graph/?g=rocU

[3] https://home.treasury.gov/resource-center/data-chart-center/...

What doesn't make headlines is the longer term average for inflation as well;

The diminishing effectiveness (in part based on global unison from 2008) meant that the federal reserve could not reach its target 2% inflation a year from 2008 until 2021.

In a history of being under inflation targets by .5% for 14 years, 8.5% in one year is partly a headline grabber. And we have wage growth happening.

> the federal reserve could not reach its target 2% inflation a year from 2008 until 2021

This is an excellent point. Between January 2012 and January 2022, CPI-U grew at 2.2% annually [1][a].

[1] https://www.bls.gov/regions/mid-atlantic/data/consumerpricei...

[a] (281.148 / 226.665) ^ (1 / 10) - 1

Most of government debt is due in a few years [1]. The interest rate is fixed as long as the government will pay off the debt on schedule. With the current debt load Gov will not pay its debt on schedule. When the debt will become due the gov will roll it over - it will basically get another loan to pay the loan that is due. If at that time the interest rates will be higher then interest expense will be higher as well.

[1] https://www.treasurydirect.gov/govt/reports/pd/feddebt/fedde...

I suspect you are better versed in this subject than I am but what about the idea that the US has essentially already committed to heavy borrowing to finance the government for the foreseeable future? Wouldn't that be a deterrent along the lines the grandparent comment was suggesting?

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