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Strategies & Market Trends : Treasury Bills, Notes & Bonds of all types
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To: Smart_Asset who wrote (1056)6/4/2024 1:02:06 PM
From: Broken_Clock   of 1138
 
Interest payments as % of GDP. Interest payments jumped to 3.8% of GDP in Q1, the worst since 1998 (the ratio is figured apples-to-apples: quarterly interest expense not adjusted for inflation, not seasonally adjusted, not annual rate; divided by quarterly GDP of $6.93 trillion in current dollars, not adjusted for inflation, not seasonally adjusted, not annual rate).

This is relentlessly heading in the wrong direction at a disconcerting pace:



Higher yields will solve demand problems. The government has been selling massive amounts of new debt week after week. Someone has to buy this debt, and when not enough investors want to buy the debt at the current yield, yields rise until enough investors emerge that find that higher yield appealing.

We know what happened when the 10-year Treasury yield briefly hit 5% in October last year: it unleashed an epic buying frenzy amid huge demand that then pushed the yield back down.

So there will always be enough buyers because the yield will rise to attract them until every last one of the Treasury securities is sold. But the issue is that those higher yields will cause interest payments to spike further.

The classic long-term unwanted remedy and consequence to overindebted governments is inflation. Inflation has the effect of inflating tax receipts, and in devaluing the purchasing power of the old debt – it’s far easier to redeem old debt with devalued dollars. And there is good reason to think that continued inflation will also be a consequence and long-term remedy this time around.

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