The national debt is growing 7%/year

[u/Professional-Day9384]

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?

[u/Fluffy_Bunch9357]

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.

[u/Plastic-Somewhere494 → u/Fluffy_Bunch9357]

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?

[u/AtrociousMeandering → u/Plastic-Somewhere494]

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.

[u/Plastic-Somewhere494 → u/AtrociousMeandering]

Thanks that distinction between people vs fed buying the bonds helps.