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Thread: America's Huge Pile of National Debt Makes Combating Inflation More Difficult

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    America's Huge Pile of National Debt Makes Combating Inflation More Difficult

    As I have mentioned before, if (really when) interest rates return to the historical norms in the US, the money spent to service the debt will crowd out the discretionary budget. What is the discretionary budget? Basically everything except for Social Security and Medicare.

    Also note that inflation can be price inflation or monetary inflation. As seen below, what we have now is monetary inflation- caused by monetary (fiscal) policy.


    America's Huge Pile of National Debt Makes Combating Inflation More Difficult

    The optimistic scenario goes like this. America shakes off what remains of the pandemic in the coming months without the need for trillions in additional borrowing, Congress doesn't pass any more deficit-busting spending plans while also allowing the 2017 tax cuts to expire in 2025 as planned, and the economy performs consistently well for the next, oh, three decades as we dodge recessions, wars, climate issues, and anything else the world might throw our way.

    Under that set of circumstances, the national debt will merely be twice the size of the entire U.S. economy by the middle of this century.
    Raise your hands if you believe this will happen.

    With inflation running at a 40-year high, the Federal Reserve has indicated that it will consider raising interest rates early next year. That's standard-issue monetary policy and basic macroeconomics, but America's high levels of debt make the maneuver more fraught because higher interest rates will reverberate through the government's own debt.

    "Fiscal policy has hamstrung the Federal Reserve," says Brian Riedl, a senior fellow at the Manhattan Institute and a former Senate budget staffer. "For the Federal Reserve to do basic, commonsense macroeconomic stabilization, it's going to hit the national debt hard because Congress has been so irresponsible."


    In a new report, Riedl outlines the fiscal and monetary trap facing federal policy makers and central bankers. In short: Rising interest rates will make the national debt a bigger problem. And the already-huge national debt makes it more difficult to combat inflation—inflation that has been triggered, at least in part, by debt-financed spending.


    Source: Manhattan Institute, Brian Riedl: https://www.manhattan-institute.org/...al-debt-crisis
    While the overall amount of debt matters too, the more important consideration here is how much the federal government spends each year to make interest payments on the debt. As Bruce Yandle, an economist at the Mercatus Center, explained last month (and again in the current issue of Reason), a combination of falling interest rates and low inflation allowed the government to stock up on debt without facing higher annual costs for much of the past two decades. "The interest cost of the national debt in 2008 was $253 billion and remained at about that level through 2015," he writes, even though the overall amount of debt doubled in those years.


    In effect, a decade of low inflation and low interest rates taught politicians that there was no immediate budgetary reason to limit borrowing. The long-term risk of massive debt was always there, but politicians are nothing if not good at ignoring problems that won't metastasize until they are out of office.
    Read the rest of the article at the link.
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    And because every dollar spent on financing the debt is a dollar that can't be spent on anything else, higher interest payments on the debt will force Congress to do one of two things. It will either have to cut other parts of the budget to pay for growing debt payments, or (more likely) it will have to drain even more revenue out of the economy in the form of higher taxes.

    Wait, it gets worse. The federal government's debt is particularly susceptible to rising interest rates, Reidl argues, because so little of it is locked into long-term interest rates. If you have a 30-year fixed-rate mortgage on your house, rising interest rates won't bother you much. But the federal government overwhelmi
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    Gee… surprise!! These $#@! politicians refusing to live within the budget and just running up the national credit card is abhorrent. If it was up to me we would go on an austerity plan. We don’t have an income problem we have a spending problem.
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    Quote Originally Posted by DGUtley View Post
    Gee… surprise!! These $#@! politicians refusing to live within the budget and just running up the national credit card is abhorrent. If it was up to me we would go on an austerity plan. We don’t have an income problem we have a spending problem.
    Exactly.
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    Quote Originally Posted by Peter1469 View Post
    Exactly.

    how can you conclude anything other than they are intentionally trying to destroy the country?
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    Quote Originally Posted by DGUtley View Post
    how can you conclude anything other than they are intentionally trying to destroy the country?
    They spend to get votes. They are in a bind. Cut spending is responsible. But a sure way to lose the next election.
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    Quote Originally Posted by Peter1469 View Post
    As I have mentioned before, if (really when) interest rates return to the historical norms in the US, the money spent to service the debt will crowd out the discretionary budget. What is the discretionary budget? Basically everything except for Social Security and Medicare.

    Also note that inflation can be price inflation or monetary inflation. As seen below, what we have now is monetary inflation- caused by monetary (fiscal) policy.


    America's Huge Pile of National Debt Makes Combating Inflation More Difficult



    Raise your hands if you believe this will happen.



    Read the rest of the article at the link.
    Good thread. It shows how simple the "why" of inflation is.
    In fact , so simple a lib might even be able to at least grab the general concept
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    Quote Originally Posted by DGUtley View Post
    how can you conclude anything other than they are intentionally trying to destroy the country?
    I agree. The haste of their actions show an urgency to do exactly that. I've never seen or studied an economic destabilization with slow growth featuring such a quick rise in inflation outside of a war economy
    The beginning stage of stagflation
    Last edited by Cotton1; 01-01-2022 at 10:25 AM.
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    Quote Originally Posted by Cotton1 View Post
    Good thread. It shows how simple the "why" of inflation is.
    In fact , so simple a lib might even be able to at least grab the general concept
    They are not seeking understanding, but rather affirmation of their beliefs.
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    Quote Originally Posted by Peter1469 View Post
    They are not seeking understanding, but rather affirmation of their beliefs.
    Aren't they cute when they do that ?

    Reminds me of a bunch of adults circling a baby trying to decide if it crapped , farted or really smiled lol
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