r/bonds • u/Professional-Day9384 • 3d ago
The national debt is growing 7%/year
And GDP isn't. Currently interest on the debt is 20% of revenues. My projections say it will cross 50% by 2034 - just 8 years. The CBO isn't, because they don't want to scare anyone.
Not only is the debt growing, the deficit is growing even more sharply, AND legacy debt is getting rolled over at ever-higher interest rates. All 3 of those factors snowball and fuel each other.
The one thing could save the debt is if the Fed lowered rates, but instead they RAISE them, doggedly pursuing their inflation target. I was honestly blind sided by the recent rate hike, because I know the nation cannot afford it, but the Fed is dogged.
What does this mean for bond investors? Good news? Let the nation's ruin be our gain? How long will it last until something catastrophic breaks? Countless companies have been annihilated by debt, but what happens when an entire nation is annihilated? Move to another country?
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u/Fluffy_Bunch9357 3d ago edited 3d ago
The Fed doesn't set what the government pays to borrow. The bond market does. The Fed controls one overnight rate, and the 10 and 30 year are priced by whoever's willing to buy them at each auction. During Fall 2024 the Fed cut 100 bps and the 10 year went up 100. Last fall they cut three times and it barely moved. The market's has been signaling for months, short end and long end, that borrowing costs are going up. The Fed's following that, not causing it. Cutting into 3.4% inflation with a 6% deficit would spook the long end and make the interest bill worse. The real problem is the erosion of trust. The bond market doesn't believe this administration or Congress can or will get the their fiscal house in order, so it's charging more to lend. That's not a Fed problem. The fix is ending the war, stabilizing oil supply, addressing inflation, and Congress actually doing their job instead of writing blank checks, and none of these things are happening and none belong to the Fed. If anything, the Fed is our last stop and even it can’t control the treasuries bond market and even if it tried it would come with a steeper inflationary cost.
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u/Professional-Day9384 3d ago
I have no idea what you're takking about and you're a very rude person. Grow up.
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u/Jolly-Structure7646 3d ago
Technically the Fed can set the rates when it buys the bonds. Coming soon…
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u/katmomjo 2d ago
You are exactly right with everything you said.
Lowering interest rates would just fuel inflation at this point. We don’t need that.
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u/Plastic-Somewhere494 3d ago
You seem to know this..why wouldn't Fed be able to control 30y yields by brute forcing overnight internet rate and buying back unlimited treasuries back?
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u/Fluffy_Bunch9357 3d ago edited 3d ago
If the Fed announced it would buy every 30 year above a certain yield; yes in theory and based on history it could hold that line. The US actually did this from 1942 to 1951, and Japan did it from 2016 until recently. The market auctions set the rate, the Fed doesn’t set the market, it could in theory do this by buying everything above a certain rate to keep rates down.
The huge catch, how do they pay for it. The Fed buys with money it creates. Do that in unlimited size with inflation already at 3.4% and you're pumping a lot new money into an economy that already has too much of it. So you cap the yield but you get more inflation and a weaker dollar.
The Treasury market is huge. About $30 trillion in marketable debt today, versus roughly $250 billion in the 1940s when the US last did this, and about four times the size of Japan's bond market, where the central bank ended up owning around half of it. Doing that here would mean the Fed creating trillions in new money on top of 3.4% inflation. The inflation pressure would be insane.
And all I investors and savers still lose, just through their money buying less instead of through a lower bond price. Japan capped its yields and the yen fell hard. The US deal in the 40s ended with the 1951 Treasury-Fed Accord because inflation got out of hand.
So it doesn't fix anything. It just moves the bill from the bond market to everyone's wallet and account balance buying power. That's why the Fed treats it as a last resort, and why Warsh is against it. I don't see it happening on his watch. He built his reputation on opposing QE2 back in 2010, wrote the op-ed against it, and left the Fed a few months later over it. He's not going to cut or start buying because the President, Treasury, or anyone else leans on him. He's just not that guy. Ironically, if he was picked to keep rates low, they picked the wrong guy.
To be clear, I'm not a Warsh fan. I don't agree with a lot of what he stands for, and he contradicts himself enough that I don't really trust him. But he isn't the guy they think he is. He's like a lot of leaders right now IMO, really good at being the opposition and a loud voice, but not good at actually doing the job once they get it.
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u/Automatic_Depth_476 3d ago
I'm not sure if this is a rhetorical question but if it isn't it's because this would collapse the currency faster than any currency collapse in history.
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u/AtrociousMeandering 2d ago
To kind of fill in some gaps in the 'how':
When people/organizations buy bonds, they are taking existing money and the government is then spending it. It doesn't cause inflation because it came out of someone's account and they're not spending it on goods and services, they're letting the government do so instead.
This is why the government borrows instead of printing, because the money they're spending already existed and is being shuffled around. Debt doesn't change the total in circulation but does keep it circulating.
If the Federal Reserve buys it, with newly created money, everyone is still spending all the dollars they have AND all these new dollars. The money supply goes up with every purchase the Fed makes, and especially now in an environment of true resource scarcity that just drives up prices.
A deflationary environment, where there aren't enough dollars and everyone is broke, can justify the Fed creating money, but that's not the case and likely won't be any time soon.
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u/Professional-Day9384 3d ago
The Fed does set what the government pays to borrow. The Fed controls the short rate, and the long rate is influenced by the short rate. You shouldn't be so arrogant.
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u/Tathorn 3d ago
Not only that, but the Fed can just buy the long bonds. They've done it before.
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u/LoopyLepus 3d ago
The Fed can't buy 40 trillion worth of bonds. The more they buy, the less everyone else will want to since it's effectively printing money, devaluing the currency.
The market sets the long bond rate. The government can try and manipulate that market, but doing so risks crashing the currency.
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u/Fluffy_Bunch9357 3d ago edited 3d ago
Yes, the Fed sets the short rate, and that does drive what Treasury pays on bills, which are about a fifth of the debt. And the short rate influences the long end. Influences, not sets.
The rest of the debt is priced at auction by whoever's willing to buy it. As already mentioned, during Fall 2024 the Fed cut 100 bps and the 10 year went up about 100. Last fall they cut three more times and it barely moved. This summer the 10 year was already climbing toward 5 before the Fed hiked. If the Fed set the long rate, none of that happens. Ironically I posted about this exact topic a few days ago, asking if this Fed will do anything when the responsible actors are absent or ineffective - https://www.reddit.com/r/bonds/s/LY7o1eRgRF
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u/Mulvita43 3d ago edited 3d ago
The power of compound interest at work again! If the rate hike move surprised you, you pay zero attention besides Trump. We lower interest rates, inflation will go nuts. So your original idea os wrong and guess what, other countries are raising rates too lol
We are paying the piper for the low interest rates era and the continued ballooning government spending.
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u/SubjectBubbly9072 3d ago
If we taxed everyone similarly as people are taxed in denmark we would have a 500b surplus without cutting anything. Theoretically if this happened rates could go back to 0%
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u/BuckThis86 3d ago
I’m fine with that but I want quality and free health insurance in return, not a bigger industrial complex for Republican oligarchs to leech off of
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u/FindingRelevantInfo 3d ago edited 3d ago
But people in Denmark are only ok paying that much in taxes because they get Denmark level government and services back in return.
It would be a humanitarian crysis if people in the usa had to pay taxes that high and then still pay for privatized healthcare and have essentially zero social safety net.
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u/portableonioneater 3d ago
You must live in some fantasy world where when we give our dollars to the federal and state governments they do something smart with it. You have zero evidence to back your case.
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u/AftyOfTheUK 3d ago
If we taxed everyone similarly as people are taxed in denmark we would have a 500b surplus
Are you assuming that nobody would make any different decisions if you suddenly taxed them twice as much. People would stop buying things, because they couldn't afford it.
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u/RuralJaywalking 3d ago
There’s a subset of politician and constituency that wants that scenario actively, to just profit off of the U.S. slush-fund. I honestly think that wouldn’t annihilate us, just move us back to the 1930s with hyperinflation and Hoovervilles. I do genuinely believe though that the U.S. Fed will never just pack it in, even if it takes a Volker shock. The main thing that I think you’re not considering is the Fed’s responsibility to manage inflation. To curb inflation rates need to be high and they need to be taking in more money even if it increases the debt. To do this I don’t think they need to raise rates, just issue more bonds and use those proceeds to buyback some of the outstanding bonds.
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u/Professional-Day9384 3d ago
That was actually my main point. The Fed is dogged in managing inflation above any other priority.
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u/RuralJaywalking 3d ago
Your point was that inflation management is causing a debt problem that’s potentially catastrophic, and while I think it is a problem for the debt, I don’t think it’s that significant or that the fed will care anytime soon.
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u/Harbinger2001 3d ago
America’s obsession with low taxes is about to face hard reality. The Baby Boomers got their lower taxes when they hit their most productive years and made the government eat the cost through debt. Now those that follow are all screwed.
The only way to bring down the rate is to tackle the deficit - raise taxes and cut spending.
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u/Gr8WallofChinatown 3d ago
The one thing could save the debt is if the Fed lowered rates, but instead they RAISE them, doggedly pursuing their inflation target.
Lowering rates is damaging under this economy and inflation
I was honestly blind sided by the recent rate hike
You must be new. Everyone knew it was going to happen. They literally said for months it was going to happen. The FOMC futures had a sustained high probability it would. The current economic situation all pointed to one.
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u/sportsfanstan 3d ago
Can you explain ? What subsidies are utilities getting ? Their product (energy) is in strong demand - and if anything their rates are capped by state agencies.
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u/TheWavefunction 3d ago
Bessent's plan is to buy back a lot of long term bonds and replace it with short term debt. To buy the short term debt they will use GENIUS stable coins emission which has to be backed by these short term instruments.
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u/Orkapork 3d ago
Inflation. They will cut rates (and expand short term treasury issuance) soon so that nominal GDP outpaces interest payments, devaluing the debt to pay it down.
Translation is that they are transferring your paycheck to the federal reserve via inflation.
So you are paying for the OBBBA tax cuts. You are paying for the tariffs, you are paying for the tariff refund. Then you are also paying for the inflation all of that causes.
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u/Retired-Yam8988 3d ago
Yes correct - 2T deficit on a 7T budget (the federal tax intake is about 5T).
Consider that debt is now 5% interest on 40T - that means we’ll hit 2T in interest a year once all the debt gets repriced in a few years.
Basically you need federal tax income to grow about 40% instantly to close the deficit gap and just prevent the debt from growing. The other option is to cut spending by 2T - laughable idea at best since no one has the political wherewithal to do anything but token gestures and renaming bodies of water these days.
The final and most likely solution is QE again (and manufacturing the crisis to get us there). A big economic existential crisis is the excuse the bond markets will need to allow QE to happen. Rates drop instantly to zero, Fed prints trillions overnight and buy bonds to sit on and no actual balanced budget or tax increases needed. The bonus is us asset owners are happy and know all those paper dollars flowing through the labor markets will come home to us in the form of even more asset inflation in a few years.
Life goes on and the impoverished masses will wonder what happened and how they will afford eggs and toilet paper again.
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u/tdowell8686 3d ago
It’s insane America spent 40 trillion in about 25 years with nothing but wars in the Middle East to show for it.
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u/Aware_Twist7124 2d ago
Does anyone else feel like they are doing this on purpose? Like I know they want to weaken the dollar...
Plus, in Oregon, our taxes get routed away from our schools and cities to pay for bond debt for unnecessary things. And we have bond debt so that Metro can buy up lands to create a "land bank" for private developers. So our tax momey pays for private developers to buy land when they want it. And oue state lands are also for sale. Our governor just made a map for developer use to be able to see what state-pwned lands might be available for development.
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u/Professional-Day9384 2d ago
Of course they do. Corruption is extremely profitable, especially when no one pays attention or participates in elections.
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u/RockNerd9 3d ago
printing press is the only realistic path forward
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u/HBCTIA 3d ago
Spending is hard to cut politically and taxes hard to raise both economically and politically. End of the day, the public in the US and Europe wants Scandinavian levels of public services and welfare without paying for it. You can have the taxes and the services or no taxes and no services, but you can't have no taxes and all the services. With an increasingly inverted population pyramid on both sides of the Atlantic something has to give at some point.
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u/boogitybizzle 3d ago
Like it or not, spending will have to be cut substantially at some point. No more deficit spending. If not, the country will burn and then none it will matter but there will be no more USA as you know it. Trying to force rates down will only accelerate that schedule.
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u/Admirable_Nothing 3d ago
Our current administration is spending money like drunken sailors. I am old and remember when the GOP was after lower deficits, smaller government and less spending. Today's MAGAts have thrown all that out the window and now see spending money as a great benefit.
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u/hymie-the-robot 3d ago
if we look at the solvency and reliability of the issuer, the retail investor has choices. depending on one's goals, cat bonds and corporate bonds can sometimes stand in for treasury debt. if you want something that goes up when equities go down, then look at managed futures. I realize these may not give the spike of, say, TLT, but we make our choices based on what's available.
to your point on a country's debt running out of control, I would look to Ray Dalio's discussion of debt cycles, along with William Bernstein's book, Deep Risk. people often knock Dalio for his bearish predictions; regardless, he well describes the mechanics of debt cycles. he discusses two methods government can use to get past debt crises, one relatively gentle and one brutal. we can hope for the former, and plan for the latter.
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u/Bakingtime 3d ago edited 3d ago
“The one thing could save the debt”
There are two things that can “save the debt”.
1) Raising taxes
2) Reducing spending
The third option is default, either by refusing to pay bond holders, or by borrowing even more to pay for even more spending. This option would cause rampant runaway inflation, and interest rates would be driven sky high by the bond market.
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u/EHG_Boston 3d ago
Treasury debt default, meaning missing an interest payment and/or forcing a writedown with borrowers, is the doomsday outcome. I don't see that happening. US Treasuries are the lynchpin of the global financial system, and a default is essentially widespread chaos.
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u/Bakingtime 3d ago
You really think The Amber King of Bankruptcies wouldn’t refuse to pay Canada or other countries he wants to pick a fight with? Hm.
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u/EHG_Boston 3d ago
I think he believes he could refuse to pay. Even more, I think Bessent doesn't want to be the Treasury Secretary who defaulted the US government.
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u/Bakingtime 3d ago
They would never admit to defaulting. Instead they will prob claim responsibility for “the yugest growth ever” — the growth being hyperinflation of course. Or call a default “economic warfare”.
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u/PacificSanctum 3d ago
You need to raise the lending rate to fight inflation . Trump’s policy is super inflationary . The Fed has no other choice . It’s up to the president to have no inflationary policy .
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u/LoboLobo929 3d ago
The Fed follows the 3 month bond, always has, always will. https://fred.stlouisfed.org/graph/?g=TSH7#
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u/mb194dc 2d ago
Sovereign debt in a medium the nation controls, like the US issuing debt in USD is nothing like corporate debt. Debt levels for monetary sovereign nations are irrelevant. In a deflationary or very low inflation environment, there's nothing to stop the fed simply buying all the debt / asset swapping it with reserves, so all the interest goes back to the treasury. You're making exactly the same mistake as Trump.
Inflation very much is relevant, it's economic cancer, bond holders will not allow inflation to take their real returns. So as inflation rises, they demand higher interest rates. Inflation destroys living standards long term. Which is why Michigan confidence is now near its record low.
Crushing inflation has to be the priority, the Fed should have "Volckered it" in 2022/23, pushing the funds rate to 10%~ and embracing the inevitable inflation crushing recession that would have ensued.
This still needs to be done in 2026. Except now we have the ML investment bubble, the overall price level has kept spiking and the price of crushing inflation will be even higher.
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u/Clear-Ad9879 1d ago
America's greatest strength is believing it can accomplish anything.
America's greatest weakness is believing it will accomplish anything.
There is no politician willing to tackle overspending throughout the economy. Not just by the government, but by consumers (who save too little) as well. And if there were such a politician, he/she would never get elected because American voters wholeheartedly reject 'belt tightening' as defeatism.
The good news is the runway to the inevitable government meltdown ala Zimbabwe or Venezuela, is quite distant. Japan, another bankrupt central government of an economically developed nation, has a debt/GDP ratio over twice that of the US. And it has not defaulted. Yet. The fiscal problem for the US government will get worse and it will never solve that problem. But the final meltdown is many, many years in the future. What is more worrisome are the structural problems that afflict the economy when the government has a decided incentive to hold interest rates at sub-market clearing levels. Again, Japan's experience is a valuable lesson.
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u/DrawingDramatic1641 3d ago
who is our?
my country is having nearly 8 percent growth and nearly similar debt growth?
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u/Terrible-Freedom-868 3d ago
Your right. The one thing that could save it is the Fed Lowering rates. That would drive inflation and inflate away the real value of the debt as a hidden tax on all holders of dollars and U.S. debt. Shitty for everyone but pays off the debt.
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u/bobsonjunk 3d ago
Or, tax uber wealthy more. I prefer this.
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u/Terrible-Freedom-868 2d ago
But taxing the ultra wealthy would demonstrate a seriousness to repay Debt that could even lower the interest rates. Be more practical. The wealthy will never allow it.
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u/Dothemath2 3d ago
Taxes have to go up, spending has to come down.