Posted on 10/08/2013 3:02:58 PM PDT by MosesKnows
I was pondering the many aspects of the nation’s debt when a thought struck me regarding the interest that America pays to service that debt. I once posted a question about what would it cost to service the debt if interest increased.
How Will America Service Her Debt?
I have a different but related thought, which is how high the interest rate would reach before America decided it to too high and stopped borrowing.
A competitive bidding process determines the interest rate for Treasury Bills, Notes, and Bonds. Large financial institutions bid on what interest rate they will accept on the bonds.
Now let’s create our own scenario. In this borrowing scenario, the interest rate bids are increasing with each auction. I assume the Risk/Reward ratio is in effect and a higher interest rate bid demonstrates that a perception of increased risk exist.
That brings up an obvious question, will the government still have a choice but to pay the increased interest.
“How high will the interest rate increase before our government calls it a deal breaker and refuses to borrow?
That brings up an obvious question, will the government still have a choice but to pay the increased interest.
“
From Wiki on Carter’s failed presidency.
The Federal Reserve board led by Volcker raised the federal funds rate, which had averaged 11.2% in 1979, to a peak of 20% in June 1981. The prime rate rose to 21.5% in 1981 as well.
Obama doesn’t care what the rate is because he’ll just order the fed to print money.
One thing almost everyone in D.C. deliberately misunderstands is how big of a benefit we got out of the gradually lowering interest rates since 1983, and how that is completely gone now. We are at the bottom of the rate curve, and have nowhere to go but up. Yet democrats think that because Obama is in power, he needs a turn to increase the debt, because Reagan and Bush did. But it isn't about fairness and whose turn it is. It is about doing the appropriate thing at the time. Reagan, Bush, Clinton, and Bush could run up the debt and then refinance it later with a lower interest rate. When Obama does it, we will refinance it with higher rates, like an exploding adjustable rate mortgage. The best thing Obama could do would be to reverse what Clinton did. Clinton change the mix of bond maturities to focus on short term bonds with lower interest rates. Obama should change the mix to favor long term bonds, and at least lock in lower rates as much as he can in a rising environment. But he won't, because it is his "turn."
Please. Show me where Clinton did that. I'd sooner think it was Greenspan.
I realize you're probably speaking loosely about what happened during his administration, but I hate to give the old slime-ball credit for it.
The Interest Rate has been effectively 0 or less for a long time and one of the problems that is discussed by economics commentators is the low level of lending and borrowing. Inflation has been so low as it is because all the money shoveled into the banks goes nowhere.
At this point I am not optimistic. I don't believe the current administration can cut spending even if they wanted to. When they can no longer borrow, they'll run the presses. When word gets out that we are monetizing our debt, things will start to happen fast.
Notice the article is not complementary, and a lot of the opinion was similar at the time, because people did not think that rates could go lower then 7%. Well, Clinton gambled and won big, because rates fell far below 7%. (America did benefit from this)
However, in a rising interest rate environment, the same strategy will lose big. For the same reason, everyone was rushing to refinance their homes when the rates went lower. Now rates are going higher, and no one wants to refinance. If we keep buying short term bonds, we will have to refinance every year, when we could choose to lock in 30 year rates.
A factor for devaluation must be included in the equation. So long as the devaluation rate equals or exceeds the interest rate the money is free to the borrower.
The debt total is decreased annually in real $$ more than the interest owed
My view is around 7%. A higher rate of devaluation will not be tolerated for long.
The key consideration is not so much the interest rate as the debt to GDP ratio, with various other factors taken into account. For the US, the dollar’s role as the world’s reserve currency gives us a greater (though not infinite) borrowing capacity.
Bonds? Heh, heh, heh.
Repub Sen: We Can Crash Into Debt Limit “Because the Only People Buying Our Bonds Are the Fed Res”
http://www.freerepublic.com/focus/bloggers/3076162/posts
6% Treasury yields sooner than you think?
http://www.freerepublic.com/focus/news/3049639/posts
JIM O’NEILL: We Could See A Bond Crash
http://www.freerepublic.com/focus/news/3031334/posts
The Treasury Bond Selloff Is ‘For Real’ And The Volume Is Gigantic
http://www.freerepublic.com/focus/news/3025102/posts
The Fed Owns 31.89% Of The Bond Market: Up 0.3% In One Week
http://www.freerepublic.com/focus/news/3060653/posts
Warren Buffett Warns: The Dollar Will Decline. Sells off longer-dated bond holdings.
(older news but still relevant)
http://www.freerepublic.com/focus/f-news/2695947/posts
In Carter’s years the mortgage interest rates were past 21% and people still bought. My parents bought at 12% in 1979.
At some point in time in the near future, the dollar will fall like a rock.
I also have heard that and from enough sources to cause me to believe that, the Feds are doing this at the rate of $85,000 million each month.
Take note of the Dow on days when the Feds discuss easing the quantitative easing.
Obama’s announcement of a replacement for Ben Shalom Bernanke will stir discussion on quantitative easing.
I can't write an equation to determine at what interest rates the Feds would cease borrowing. The number of variables would be enormous. It would be academic at best because the obligation to service the debt is not a matter of choice.
Setting that aside let me see if I can understand why I agree with your observations.
I would agree that devaluation of the dollar must be included. However, it can become tricky for a layman as myself.
Dollar value is a function of existing dollars.
Existing dollars is a function of debt.
Debt is a function of borrowing.
Borrowing is a function of inflation.
Inflation is a function of how many dollars exist.
A circle if you will.
Introducing spending into the equation provides a control variable resulting in a solution, which is, spending controls inflation.
-——I can’t write an equation to determine at what interest rates the Feds would cease borrowing-——
They don’t call economics the black art for nothing.
In my mind at some point the art overcomes the science. The borrowing ceases when the building is on fire and the doors are being knocked down.
-——Borrowing is a function of inflation.-——
I would argue this factor is incorrect. It seems to me that since inflation relates to the increasing magnitude of the debt, the borrowing that increases the debt is at root a cause of the inflation.
I am heavily influenced by one source “The Power of Gold, the History of an Obsession” by Peter L Bernstien. It is the story of gold and governmental problems since nearly the beginning of recorded history. It is very very interesting and relates the actions and problems of just about any body who was anybody.
Having listened to it several times as I travel I came to believe there is course called Inflation 101 that is part of the course of study for all young princes that would be king. Many get in debt and have troubles similar to those we are in now. The solution is always the same since very early on. Cheapen the money. That is the tried and true.
I have almost concluded that Obama has saved the inflation for the next prince to deal with. He sees his job as raping the treasury and running up the debt as far as he can. Let the next SOB worry about what to do with the debt.
Per Inflation 101, there will be inflation to reduce the debt. The question is only when
Per Inflation 101, there will be inflation to reduce the debt. The question is only when
There are a lot of scenarios. Personally (if we are lucky) I think we might follow a variation of what happened to the USSR. It went out of business and power went back to it’s satellite countries.
There is a storm coming and no safe harbour.
-——There is a storm coming and no safe harbour-——
I will not attempt an argument to refute that thought. The possibility is strong. You may certainly be correct.
We shouldn’t confuse nominal rates with real rates (nominal minus the inflation rate).
Real rate? People were paying 21%. That is about as real as it gets.
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