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Comment by wireprotocol | Hacker News Reader

The thing that worries me about our debt is that it's not like the rates are locked-in for 1000 years. After bonds mature, we need to issue new bonds to pay for them. And if the interest rates are higher at the time, the new debt will have a higher interest rate (I guess, technically, the bonds will sell for a lower price, which has the same effect).

Paying our current level of interest on our debt is not crushing. But it's not hard to imagine the rates tripling (or more) considering how close to zero the rates are now. Then we are over $1 trillion/yr in debt service (if my calculations are correct).

Combined with what seems like a structural deficit, I don't see any good way we'd get out of that.

In other words, we're not falling off a cliff now, but it seems like fragile situation.

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My guidance to others, when they ask about US debt, I suggest they watch Japan. When Japan's interest rates rise, even just a little, their debt will become unserviceable. Once that happens, it will be time to think hard about US debt. The plan is clearly to inflate out of it. Survivable for the wealthy, devastating for everyone else.

The blog post raises some fair points, but the author does a pretty poor job at getting any point across. The most concerning things right now are: low interest rates on very high risk debt, continued and dramatic growth of derivatives (you fail, I fail, we all fail), and China's decision to push the 2008 correction in to the future finally running out of steam. The geo-political issues in the Middle East, North Africa, and Asia are a whole other cause for concern.

I think the risks now are still fairly benign compared to what was faced during the Cold War (though we still build new nuclear weapons and delivery vehicles, Russia fell short of its recent goal of 300 and instead has built 30 so far.)

> The plan is clearly to inflate out of it.

[[Citation needed]]

There is probably 10% slack right now before you even get to mild inflation. What's concerning to me is geopolitical instability while the economy is teetering on deflation. This state is strongly correlated with big wars.

Not being sarcastic here.

2013 A = Debt is around: $17.5 trillion B = Debt Service: $416 billion C = Average Rate: 2.38% ($416 billion / $17.5 trillion) D = U.S. Tax Revenue: +/- $2.8 Trillion

Things won't get interesting until B approaches D.

So one way of looking at is if everything remained constant (which it won't) you'd need 15% interest rates on the current debt for debt service to approach tax revenue. If interest rates stay the same you could increase the debt to $128 trillion.

Reference: Debt: http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm Debt Service: http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm Tax Revenue: http://www.usgovernmentrevenue.com/

"Things won't get interesting until B approaches D."

I'd say things would get pretty interesting well before that point. B=D is just the point at which a default is inevitable (unless much higher tax revenue is achievable without causing other problems).

But the problem is that the interest rates are so low now that large increases are not outlandish. 7 years ago, the rate was more than double what it is now. Looking at the graph in the article, in the 80's it was over 10%, more than 4X the current rate (which would imply 1.6 trillion in debt service).

It seems like we're making a big bet that interest rates are down permanently. That may be true, but it seems like a fragile assumption to me.

Interest payments as a percentage of GDP are actually much lower now than they've been in the past:

http://research.stlouisfed.org/fred2/series/FYOIGDA188S

Interest doesn't get come out of the GDP, only the Government pays it.

The government pays it, ultimately, out of tax revenues derived from GDP.

That doesn't dispute my point at all. I'm not worried about the payments now. I'm worried about the payments if interest rates go up.

And we shouldn't be surprised if rates go up substantially, because they are at historic lows right now.

There is a reason why they are at historic lows-- it is the decision of market participants. Your concern is essentially that market participants will somehow do a complete 180, for no stated reason.

"Your concern is essentially that market participants will somehow do a complete 180, for no stated reason."

If market participants demand a higher interest rate, I wouldn't call that a "complete 180".

Regardless, change is the only constant, as they say. Markets move. Behavior changes in response to the environment. If we really are supposed to be a risk-free place to loan money, then I would think we'd be a little more resilient to rising interest rates, which happen fairly often historically.

If you count the federal reserve as a market participant.

I agree that it will happen before B equals D but no one knows the tipping point ratio. In theory, a government can always argue right up to that point that, "we'll grow our way out of this."

There is no reason for the government to default when B=D. (If you disagree, please take a deep breath and think through the mechanics of exactly how the US federal government could be forced into default.)

In reality, B=D is likely to balance itself out again. This becomes apparent once you think through where the interest payments go.

If they are reinvested in government bonds, nothing happens. If they are reinvested in other financial assets, the general interest rate decreases, which will also pull down the interest rate on government bonds (reducing B). And if the interest payments end up with people who spend them on goods, well, that grows the economy, which increases D.

However, it is hard to imagine that interest rates would increase without a serious uptick in economic performance. Such an uptick would automatically go hand in hand with increased tax revenues and lower spending (because social safety net spending would shrink automatically).

Basically, any scenario in which interest rates grow are scenarios in which automatic stabilizers will reduce the government deficit in other places. It's a healthy system in which the feedback mechanism go in the right (i.e. stabilizing) direction.

Why is that hard to imagine? If, hypothetically, our economy fell off a Great Depression style cliff, wouldn't that make it harder to pay our debt, expectation of which would force rates up, and be somewhat self-fulfilling?

"However, it is hard to imagine that interest rates would increase without a serious uptick in economic performance."

It's not that hard to imagine; what you describe is essentially Stagflation. You may consider it unlikely, but there are some known potential causes[1].

As I understand it, Stagflation happens when increased demand is less able to stimulate increased supply than one might expect.

As mentioned in [1], an oil supply shock could be a cause. That is not outlandish given the current instability in the middle east and our tense relationship with other oil producers (Russia and Venezuela). The US and Canada do produce a lot of oil, which may offer insulation, but I don't think that's necessarily a defense.

Another cause listed is tough regulatory atmosphere. For instance, if the EPA decides to strongly curb CO2 emissions, or misguided labor laws come into effect, or the healthcare system in the US gets even worse. Again, not outlandish.

[1] http://en.wikipedia.org/wiki/Stagflation

EDIT: reworded for clarity

Ah, right. I still think there are two mitigating factors here to what I said.

First: In the stagflation of the 1970s (which is really the only significant empirical data point we can draw from), increased interest rates were a political choice made by the central bank rather than an economic necessity.

Second, and more importantly: Stagflation is characterized by inflation, which means that nominal GDP grows even while real GDP is stagnating.

Since real GDP is irrelevant to the debt-to-GDP ratio (witness the debt-to-GDP ratio through the 1970s), the conclusions for whether one should worry about the debt-to-GDP ratio remains the same as far as I can tell.

Generally, when interest rates pick back up, revenues rise faster.

We're fragile because ( IMO ) we're running the money supply too lean - especially for people who are in the grey market economy.

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