Just because the debt is a big number is not, by itself, a cause for concern.
barb dybwad
23

Well, not really. The Fed doesn’t “control the interest rate on the debt”. True, it sets the nominal rate on the bond, but that bond is sold at auction, which sets the actual interest on the purchase price that the buyer demands. If the buyers want a higher rate, they will bid below the maturity value of the bond.

Whenever one sees an argument that “we owe the interest to ourselves” as justification for saying the interest is harmless because we can simply not pay it and there are no consequences, you are being conned. If the government does not pay the interest when due, investors will simply stop buying the new bonds. So the government will not have the cash to pay off the old bonds as they mature. That, folks, is insolvency and default.

That argument regarding the debt held by the government itself, as in Social Security, is patently absurd. If the government does not do the bookkeeping to keep up the pretense it is paying interest, then when SS benefits are due, the government will have to make up the loss from the general fund, and the same amount of money will leave the treasury. Again, the reader is being conned.

The other, real danger of high debt is not mentioned at all in this article. We have about 20,000 $billions of debt, at some overall interest rate, let’s use 3.5% for argument. So each year the government has to pay about $700 billion in interest from our government budget, plus sell enough new bonds to cover those that mature plus cover that year’s budget deficit, now running about $500 billion. Now let’s say interest rates recover to their historical 5%. Now the annual interest payment becomes 1,000 $billions. Since we are running a deficit, this adds another $300 billion to our annual budget deficit, which becomes $800 billion. That $800 has to be borrowed, becoming new debt adding another $40 billion in interest. More important, that 1,000 $billions is not available for government programs and social obligations. The Citizens get the shaft.

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