Tuesday, June 28, 2022

Interest Rates and Debt

The US Federal Reserve is raising interest rates to control inflation. This creates a problem for the US government, which needs to borrow about a trillion dollars every year to cover its budget deficit. Since the US has begun freezing the reserves of its enemies, selling this debt to the Chinese and Saudi Arabia is getting harder. The only alternative is to sell this debt to the Federal Reserve, but as part of their efforts to reduce inflation, they are reducing their asset purchases.

The US currently has debt worth more than $30 trillion, so higher interest rates will be painful. If interest rates increase to the level of the inflation rate, the annual interest bill would be more than $3 trillion dollars. This is more than the government collects in income tax. I presume that the only option is to kick the can down the road by borrowing more to pay the interest.

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