Paul Krugman has a column today about interest on the national debt. It's going up thanks to the Fed's rate hikes, but he says it's not likely to be a long-term problem. His explanation gets a little complicated, though, so I'd like to simplify it. Here is every significant Fed interest rate hike from the past 60 years:
With one exception, interest rate hikes tend to last 3-4 years before reverting to their previous level—and while you might want to argue with my precise figures, there's no point in that. All I'm saying is simple: the Fed raises rates and the Fed lowers rates. Our current rate hike will likely be over by 2025 or so. And when that happens, interest on the national debt will go down.
Krugman says the same thing with a formula: on average, interest rates tend to be lower than GDP growth, so over the long term they aren't a problem. In our present case, I'd say the longer term is another couple of years, and that's all.
Obviously, interest on the long term bonds issued at higher interest rates will not decrease until the bonds mature. Don't know if the Treasury actively manages it's interest rate profile (by going short term if they think the interest rate spike is transitory) or simply issues new long bonds to refi maturing long bonds.
The higher rate of course applies only to newly issued debt, for the amount of the current budget deficit, plus mature bonds being rolled over. I don’t know what fraction of outstanding bonds gets rolled over in a year.t
"With one exception, interest rate hikes tend to last 3-4 years before reverting to their previous level—and while you might want to argue with my precise figures, there's no point in that."
I don't think this is an insightful thing to say. It's not "with one exception" just because you choose to ignore the other exception (1994-2002 or so).
If you're just going to go by the graph alone, I'd say that what the graph is really trying to tell you is simply that the business cycle seemed to have a pattern from the mid-60s through the mid-90's, but that pattern hasn't obtained since then.
But instead of just looking at the graph, I'd start with the basic idea that the Fed was more concerned about unemployment in the 1965-1980 period, then focused more on inflation until recently. I don't think a pattern that obtained in the 60's and 70's is necessarily meaningful today; both the economy and the Fed's reaction function may have changed too much for that.
"Our current rate hike will likely be over by 2025 or so."
But if you're going to look back at the 1968-1993 period, as mostly you're doing (4 of the 5 "peaks" shown in the graph), that's a period where mostly the FF rate stayed above 5%, which would suggest that recent rate hikes will likely not have been reversed by then, maybe further rate hikes are coming if inflation (and/or NGDP growth) stays high.
He excluded the 1994-2001 espisode because it was a small increase from the 1993 lows and actually no increase at all from the then recent baselines of the 70s and 80s.
And if the National Debt is a serious issue, "we" could raise income/revenue to pay it down.
Except one national political party in unalterably opposed to such a thing as a matter of bedrock policy.
What? No no no. The only cure is tax cuts for the rich. Those cure everything!
Herpes, too?
First, I think you -- and everyone else -- needs to be explicit on why the Fed rate affects the interest rate on US debt. The casual reader might not understand the mechanism.
Second, looking at the long-term chart of the Fed rate, who amongst you does not believe that we will return to the ZLB?
Third, if inflation was primarily exogenous and roughly transitory, wouldn't you assume that rates will come down sooner than later? That isn't to say that we're headed for a recession, but rather, we're going from disinflation to deflation.
The rate that the Fed is paying on reserves is effectively a floor on bond rates. Nobody is going to tie up money in bonds unless they can do better than what the Fed is offering on reserves.
The interest rate on risk free Federal Government liabilities, which include bonds and reserves, should be zero. There are more effective ways to regulate the economy than interest rate manipulation, and aside from that, there's no public purpose in paying interest on Government liabilities. It's just giving money to people because they already have money.
????
I don't think the rate will go back down to zero in the next ten years. We could do without reversion to that abnormal level.
What's your reasoning?
Here are my thoughts:
The rise of anti-immigration sentiment and tightening of asylum entries, the continued decline of the birth rate, the increased income disparity, and the accelerated boomer retirement are all deflationary pressures a la Japan.
But interest rates on Japanese government liabilities are near zero (because the BOJ wants rates to be zero, and rates on fiat money are determined by central banks).
Yes. That's the point, isn't it? When you're at the ZLB, you have to expand QE and the easiest way is to expand your balance sheet (targeting federal securities) to $5T USD. It was referred to as Abenomics. Starting in 2012, Shinzo Abe pushed for massive federal spending and loose money policies including QE -- https://fred.stlouisfed.org/graph/?g=17De6
You mean to say it will be ... transitory? ...
[sigh] You are SO totally MISSING THE POINT. Interest rates are going UP! The Fed target rate is going UP! Interest on the debt is going UP! People are paying more (this week) at the gas pump! RECESSION IS COMING WE'RE ALL GONNA DIE!!!11!!
Recession has been the media narrative for, what, going on a year now? Longer? And despite steady growth, full employment, rising real wages, remarkable reductions in various differences in earnings among various demographic groups, a rising stock market, a stable bond market, and I dunno what all else, recession is still the Narrative, data be damned, and you're gonna hear it!
Coverage of economics in the MSM is not merely unreliable; it's often deliberately intended to entertain and inflame, and to serve favored interests, rather than inform. For informed analysis, you gotta go elsewhere (Krugman being an exception notable for its rarity).
The 2024 election likely will turn on the state of The Economy, despite the fact that Americans largely understand very little about economics other than personal/family budgets (and a lot of them don't even do budgets). It's kinda scary...
What you slice-up at three or four distinct events circa 1963 though the 80s looks just as much like one, multi-decade era of rising rates. The “lows” therein get higher event after event.