I don't see anyone mentioning that the United States needs to manage its massive national debt, currently in the trillions, by issuing Treasury securities. These securities mature at varying intervals and require continuous "rolling" or refinancing to pay off old debt with new borrowing.
Significant rollovers are expected from April through September 2025, with additional short-term maturities due by June.
Higher interest rates significantly complicate US' ability to refinance. The cost of servicing this debt — paying interest rather than reducing principal — is already a major budget item, surpassing Medicare, approaching Defense and Social Security levels.
If rates don't come down soon it locks in higher costs for years. The country is at risk of a debt spiral.
How can rates come down? The present uncertainty around tariffs and a potential crisis could create conditions that pressure interest rates downward before those Treasury securities mature, by influencing Federal Reserve policy.
Treasuries are considered safe during such crisis. Increased demand for Treasuries pushes their prices up and yields down, effectively lowering interest rates.
> How can rates come down? The present uncertainty around tariffs and a potential crisis could create conditions that pressure interest rates downward before those Treasury securities mature, by influencing Federal Reserve policy.
Rising prices due to tariffs won't pressure the Fed to lower interest rates. It will increase inflation and worries of inflation, which will actually pressure the Fed to RAISE interest rates. A slowing economy won't stop inflation... We are likely entering into a period of "stagflation". The way out last time was very high interest rates and short term economic hardship.
Prices rising due to tariffs isn't "inflation" in any traditional sense. It's not driven by consumer demand, and therefore the logic for raising rates (i.e. slowing economic growth by reducing money in the market) doesn't apply.
> Prices rising due to tariffs isn't "inflation" in any traditional sense.
Yes, consumer prices rising is inflation in the traditional sense (since, unqualified, “inflation” refers to increases in consumer prices.)
> It's not driven by consumer demand,
Inflation is not restricted to demand-pull inflation, which is why the term “demand-pull inflation” has a reason to exist.
Tariff-driven price increases are a form of cost-push inflation.
> and therefore the logic for raising rates (i.e. slowing economic growth by reducing money in the market) doesn't apply.
The existence of cost-push inflation doesn't change the short-term marginal effects of monetary policy on prices, so of you care just about near-term price levels, the same monetary interventions make sense as for demand-pull inflation.
OTOH, beyond short-term price effects things are very different: demand-pull inflation frequently is a symptom of strong economic growth and cooling the economy can still be consistent with acceptable growth.
Cost-push inflation tends to be an effect of forces outside of monetary policy which tend to slow the economy, so throwing tight money policy on top of it accelerates the slowdown. This is particularly bad if you are already in a recession with cost-push inflation (stagflation).
The good thing, such as it is, about cost-push inflation where the cost driver is a clear policy like tariffs, is that while monetary policy has no good option to fix it, there is a very clear policy solution—stop the policy that is driving the problem.
The problem is when there is irrational attachment to that policy in the current government.
You're just using new terms ("cost-push inflation") to disagree without actually disagreeing.
> so of you care just about near-term price levels, the same monetary interventions make sense as for demand-pull inflation....Cost-push inflation tends to be an effect of forces outside of monetary policy which tend to slow the economy, so throwing tight money policy on top of it accelerates the slowdown. This is particularly bad if you are already in a recession with cost-push inflation (stagflation).
Again, you're just saying the same thing that I wrote above, but arguing (?) that it's actually called "inflation".
If your point is that tariffs are bad, fine. We both agree that what you call "cost-push inflation" is not something you'd rationally raise interest rates to counter.
Increasing cost of imported goods will increase demand on equivalent domestically produced goods, which are also often supply constrained. Locally produced goods will increase their prices as much as the market allows (which is somewhere around the cost of the imported good with the tariff). Tariffs cause inflation as a whole.
When the tariffs are dropped, do you think the price of the imported good is going to go back to the original price? If the domestically produced version is priced near the tariff price, they'll reprice slightly lower than the domestic price, ensuring prices stay high.
If a pair of shoes today costs $30, and a pair of shoes tomorrow costs $60 (not saying this will happen, just positing a scenario), from a consumer perspective, there has been 100% inflation in the price of shoes. It doesn't matter that the price increase is due to tarrifs on imports from Vietnam.
I'm an American that owns/operates a design and manufacturing company -- we build customer products in China and export to USA buyers. Let's say we build the customer product and sell it to them for $20 ex-works China. That means USA customer must pick it up at our dock and pay the shipping fee. Lets ignore the shipping fee to keep it simple. Assume USA customer currently sells the product for $80 in USA. If USA customer now needs to pay 35% import tariffs on $20/unit, then their cost goes up $7 USD. If USA customer passes 100% of that cost to their own final end customer, then they need to start selling it for $87 USD. So 35% tariff ultimately turns into a price increase of 8.75% for consumers.
But actually, tariffs have been 10-25% anyway for a number of years. So for existing products, some tariff cost was already included in that $7 total tariff cost. So, for existing products, the cost may go up ~$3.50 and our customer would sell it for ~$83.50 and the actual increase consumers would see is ~ 4.5% increase.
Now, this is a typical pricing scenario for our USA customers, they are selling individual products that cost $20 in China at volume, in USA at retail for ~3x-5x the per unit purchase cost from China, this is quite common. Now, the USA customer must buy ~5000pcs to get that $20 USD unit cost, while consumers get to buy only 1pcs and pay $87 USD, whether or not that is fair pricing given the risks and R&D costs, that's just the reality. Anyway, I'm not sure of the ex-works cost of shoes, but I'm highly confident big brands like Nike sell them for at least 5X the ex-works cost. So the math would be similar.
Yes and there will be the usual political consequences associated with inflation; but this type of inflation is caused by a tax and cannot be combated by raising interest rates.
Why wouldn't a rate hike make a difference? It will lower demand and therefore prices, no? I mean, this isn't really something that we should celebrate or want, since it essentially just means discouraging people from buying shoes because they can't afford it, but it does bring the prices down (or at least slow the rate of shoe price increase).
A couple of things. In practice, most goods are actually priced as cost-plus, with very thin margins, and any response in prices is highly asymmetric.
If the purchase costs for a good suddenly increase, retailers will increase prices very quickly because they would otherwise start losing money very quickly.
If demand for goods decreases, that doesn't affect the retailer's cost of goods at all, and if they were to reduce their prices, they'd eliminate their thin margins. From their perspective, it's better to sit on inventory for a while.
So any downward pressure on prices would happen much more slowly.
BTW, this kind of asymmetry is why a bit of inflation is good, actually. Inflation acts as a universal and permanent downward pressure on (real) prices, in the sense that if retailers and others are unable to justify an increase in nominal prices to their customers, their real prices will drop.
True but that mechanism is indirect at best. Usually high interest rates discourages more borrowing and lowers spending that way.
But in this case the price increase is already due to the government putting its thumb on the scale. The best way to reduce the price is not via the Rube Goldberg interest rate mechanism to shrink spending and thus demand for the $60 shoe, but by removing the tariff and make it a $30 shoe immediately.
I 100% agree with you, but the Fed is independent and they only have a few levers to pull.
They don't make policy and they go out of their way to not comment on policy. They say they are apolitical (though of course they are 100% pro-establishment).
If the entire government was working together, yeah, sure, your theory holds. But that isn't how things work.
It's only inflation if you also double your earnings (tongue in cheek, this takes obviously place on a macro scale). This is about balancing costs. Globalization created environmental externalities that are not sustainable. While you enjoy the $30 pair of shoes, the people by the factories suffer.
Almost nobody importing goods is really checking the supply chains properly enough. We have pretty strict EPA laws here that are a tariff in their own way.
If the consumer price index, which is a metric the Fed uses, goes up, then inflation has gone up. Every dollar buys you less (less purchasing power), and the nominal price has increased. To me this indicates inflation. Of course, you need to calculate how this balances out in terms of jobs/wages and the flow of investment, but that's really hard to figure out at this point in time.
I'd expect the CPI to go up in the event of global tariffs at a baseline of 10% assuming all things go ahead as described.
Yes, that's fine. But if the acute cause is not consumer demand, raising interest rates won't do anything.
(Note: a sibling comment suggests that it "doesn't matter", because if you slow the economy enough, you'll offset the artificial "inflation" due to tariffs. Maybe so. But that would be cutting off your arm to treat a paper cut.)
But the acute cause is consumer demand. If the consumer reacted by not buying the tariffed stuff there would be no cause for alarm. But no, they continue to buy the higher priced goods. I'm not sure what happens next, but it seems if that is allowed to continue some sort of feedback loops develops leading to inflation getting out of control. We've seen that happen often enough, and the effects are devastating. So devastating governments use the interest rate hammer despite knowing it will likely get them thrown out of office, which is what happened to Biden.
The interest rates hikes (again for reasons I don't understand) effectively suppress demand. But it isn't necessarily demand for the tariffed goods, it's overall demand. Typically what you see drop is advertising, restaurants and similar discretionary spending. Notice they are services - not tariffed goods. This brings down spending to match income, and which somehow keeps inflation dragon in it's box.
In other words, the point of raising interest rates isn't to cure the tariffs. The only thing that can do that is to remove them. Instead it's to counter the effects of the tariffs - which is that they have made the economy less efficient, in the sense in the consumers can purchase less stuff with the money they have in their pocket. The consumers are in a very real sense poorer. The interest rates are just a hammer to ensure they act like they are poorer, and buy less stuff, and bring the economy back into balance. They react to being beaten with that hammer by voting out the party that chose to hit them with it. But it was for the own good, and so the political party deploying it has effectively decided to take one for the team. For all the cynicism our political systems and the politicians cop, I sometimes think they are undervalued. (But only sometimes, and only some of them.)
I suspect Trump is thinking "but the money hasn't been destroyed - I've now got it". And that's true. The effect of the tariffs is to divert trillions of dollars (by Trump's calculations) to the USA federal government. Before the citizens of the USA were free to spend that money as they see fit. Now they have handed over to Trump, and so have have effectively lost a freedom they once had.
If you look at other economies around the wold that have dragged themselves up by the bootstraps by imposing tariffs, like say China of Singapore, they poured that money into infrastructure, education and R&D. Maybe spending it in that way is perhaps more productive than letting Joe Sixpack using it to pay for takeout. I dunno.
Admittedly it's still an open question, but to me it seems the odds of Trump spending the money in that way is remote given he is currently cutting back on those very things. Perhaps even more telling is the USA go to be the most powerful economy on the planet by explicitly not letting government decide on where surplus money should be invested, but rather leaving that decision to it's capitalist economy. As it is, Trump is moving the USA from a capitalist economy to a command economy, with him in command.
Amazing stuff to see. I'm glad I'm watching from afar.
I would be ready and prepared to sacrifice a fair amount of my quality of life for the greater good (of being more self-reliant, more secure, bringing some manufacturing back on shore, etc, etc).
But these guys have basically said "we're all going to have to suffer, and then..." nothing! No huge capital investments into green energy. No workforce retraining. No infrastructure. Nothing. So yeah, you're asking me to sacrifice my quality of life? For what? Ew, no thanks!
Of course, I'm pretty confident I know where this money is going to go: contracts and grants to private corporations owned by Trump's personal network. They are already prepping for this by gutting huge swathes of the federal government. When they say "actually, we think some of these functions were necessary after all, but for efficiency reasons, it's best that private companies take over these functions..." naturally those contracts will go to the right people who are capable of making america great again.
It's actually insane, it has me absolutely livid about this whole situation. Sorry, I do not care how anyone feels about "the libs." These people are going to steal the quality of life -- that my parents built, that my grandparents fought a war to create -- from me and my children. They will use it to enrich themselves. They will burn the this country to the ground to accomplish this.
One way around this might be a twist on Goodhart’s Law: if you come after the people at BLS who produce the CPI [0], and replace them with political appointees, then maybe you can arrive at an “improved” CPI that hews more closely to your political desires. Assuming you’re the kind of leader who privileges optics over high-fidelity data.
The fact that we decided allow a massive tax increase by executive fiat is irrelevant. The fact that we’re risking a death spiral from decreased consumer demand via government imposed inflation is irrelevant.
You’re right in that the usual formula of turning the knobs on interest rates to ease economic challenges is unlikely to work. We may have to turn the knobs to prevent a total death spiral, however. Get ready for 16% mortgages.
It doesn't matter what the root cause of increasing prices is. Fed doesn't have any other levers but to adjust rates up to reduce demand. It will work either way because even if demand is not the source, it will reduce whatever demand that was there.
You can’t isolate these things, the Fed’s charter is to try and reduce inflation for consumers not regulate the bond market for the US debt, but their interest rates and repo actions move the bond market.
Actually, price increases caused by tariffs are a type of inflation—specifically, cost-push inflation. This is consistent with standard definitions found in macroeconomics and international economics textbooks.
Inflation is definitely going to happen due to tariffs. If I'm paying 20% more next year on average for products above what I'm currently paying that is 20% inflation for me, that is what people will see; they don't care about your purist form of inflation arguments. They also vote against people who cause inflation, especially when they promised the opposite.
It doesn't matter what causes inflation. It's always a sign that there's more money than is needed for current and anticipated levels of economic activity. And the correct course of action is always to raise the rates to reduce the pace that the money is printed at.
At least if you care about avoiding hyperinflation.
The logic is very reductive. It's like: "the Fed's job is to cut a snake, so if they see a snake around their head they'll just close their eyes and cut both".
Raising rates does Absolutely Nothing to undo the tariffs or bringing the price down. Fed is not a blind machine.
+1. In my relatively uninformed opinion what trump is doing is accelerating a kind of global arbitration in which the US is no longer the dominant economic power. We are going to have to share our toys. The “3rd world” is developing and it isn’t as easy to bully the globe into doing all our dirty work.
In my imagination, 50 years from now we will have a quality of life more similar to Central Europe: fine, but nothing special. Most people will live much more simply, rent smaller spaces, drive less ostentatious cars that they share. People will live with their families out of necessity and strawberries won’t be available in December.
Since people won't actually have more money to spend, you would expect it to lower the prices of other things like housing or travel. So there should be a negligible impact on inflation depending on the weighting.
This is flat out wrong. The Fed raises and lowers interest rates to stimulate or tamp down demand. Raising interest rates because prices rise while demand drops due to a trade war would accomplish nothing.
> The Fed has two mandates: maximum employment & stable prices.
It actually has three listed in the Federal Reserve Act:
* Maximum employment
* Stable prices
* Moderate long-term interest rates
It's popularly called a “dual mandate” because it is perceived that properly balancing the first two will naturally also achieve the third.
> If prices go up, the Fed is mandated to raise interest rate.
No, it isn't, especially if employment is already below the “full employment” level and expected to drop even without the rate hike. Demand-pull inflation in periods of strong employment and economic growth or looming deflation in periods of weak enoloyment and economic growth are easy-mode monetary policy choices (at least as to direction, magnitude may be tricky).
But tariff-induced cost-push inflation in weak growth slowing employment conditions, where Congress and the President decline to remove the non-monetary policy root cause, that’s hard-mode monetary policy, because the usual tools to address either the employment or price problem will make the other worse.
They're mandated to raise interest rates in the event of structural inflation, not in the event of a one-time increase in prices. It would be silly if the government increasing the VAT required the fed to increase interest rates.
Even if the tariffs work as desired, they result in persistently higher prices. Unless you're expecting American laborers to work for less than literal Chinese robots, I guess.
Right, I’m just saying that raising interest rates in response to that doesn’t make any sense. It would be functionally equivalent to raising interest rates as a response to an increase in the income tax rate in order to restore the buying power of your pre-tax-increase income.
Link seems broken? From what I’ve seen of what Powell has said, it seems to track with my post, e.g. “Our obligation is to keep longer-term inflation expectations well anchored to make certain that a one-time increase in the price level does not become an ongoing inflation problem,”
i.e. It’s not the price increases directly caused by a tariff or sales tax that they’re trying to prevent, it’s any knock-off effect in price expectations that causes additional inflation.
The dual mandate makes plenty of sense when you realize that the Fed and monetary policy aren't intended to be the whole of economic policy, and that the actual main piece of economic policy is with Congress and fiscal policy.
The first sentence is right. The second is wrong, as implied by the first. If raising interest rates would exacerbate a recession and thereby unemployment, the fed will not do it just because prices are rising. You are ignoring half of their mandate.
The Fed has a mandate to keep inflation under control but a lot of leeway to decide if they should increase interest rates or not. If they see a price increase as temporary or structural, and not based on an interest-rate-responsive process, they will not increase rates. Some prices are "sticky", some are definitely not.
No - because generally there will be a lot more folks in the labor market with less leverage so they will not need to pay more in order to attract the talent they need. This is also why inflation is typically solved by recessions. They reduce labor demand which reduces wages which (generally) reduces the price of producing things overall.
1) Economic/Monetary Inflation, which is an increase in the money supply in an economy driven by government or central bank ("print money").
2) Price Inflation, which is an increase in the general price level of goods and services that people typically notice at the groceries or gas and usually derives from monetary inflation, but can also be due to the new tariffs.
Is the Fed going to do the same confusion and use 2 to justify higher rates for longer?
I think they shouldn't unless they're being disingenuous and politically motivated (push just enough to make the entire Trump mandate an unending crisis until Democrats get back in power).
According to monetarist theory these two things are one and the same.
The main source of "money printing" is banks making loans. And this is what the Fed targets when it raises interest rates.
I'm not quite sure whether tariffs really do lead to inflation. It depends on how consumers and companies respond to higher prices of imported goods and to the general sense of uncertainty.
It's not something I was aware of until recently, but I was surprised that it was not more under the control of the government and central bank (in the UK, anyway, if it turns out it's different in the US).
Interestingly that paper from the Bank of England makes no mention of "fractional reserve" anywhere, but they do say:
>Another common misconception is that the central bank
determines the quantity of loans and deposits in the
economy by controlling the quantity of central bank money
— the so-called ‘money multiplier’ approach
>While the money multiplier theory can be a useful way of
introducing money and banking in economic textbooks, it is
not an accurate description of how money is created in reality.
Rather than controlling the quantity of reserves, central banks
today typically implement monetary policy by setting the
price of reserves — that is, interest rates.
>In reality, neither are reserves a binding constraint on lending,
nor does the central bank fix the amount of reserves that are
available
Anyway, I think I'm digressing from the topic a bit here - but I _think_ what I've learned recently is that in the UK it isn't actually fractional reserve banking, which I was surprised by.
>but I _think_ what I've learned recently is that in the UK it isn't actually fractional reserve banking, which I was surprised by.
The BoE doesn't currently impose a mandatory reserve requirement. They do have more general liquidity requirements though (central bank reserves being one possible source of liquidity). I would still see it as a fractional reserve banking system, especially as these minor differences don't matter for the question of how money is created.
Yeah I think that's a fair shout, the main element being that private banks create the money via loans. Thanks for engaging, I appreciate the discussion. One day I might grok how modern economies hang together, but I've a way to go yet.
>I'm not quite sure whether tariffs really do lead to inflation. It depends on how consumers and companies respond to higher prices of imported goods and to the general sense of uncertainty.
They won't absorb the new costs. That has not happened in the history of capitalism as far as I am aware. Higher costs will inevitably equate to higher prices without an offset somewhere.
Investors don't like unpredictability, which Trump has already shown to be very unpredictable in regards to tariffs (the whole on again off again stance changes for example).
Higher prices also lead to less buying activity. History has proven this out too.
If you mean that importers will not absorb costs then I agree. They will pass on most of the costs, if not immediately (to avoid sticker shock) then over a period of time.
But the question is what happens to demand for imported goods and demand for everything else. At constant money supply, prices of some goods going up could put pressure on the price of other goods and services, although this seems less likely as the tariffs are so extremely broad.
A lot depends on how people respond. Will they reduce saving to pay higher prices? Will they take out loans to maintain living standards (creating new money in the process)? Or will they cut back on spending causing a recession?
And what will companies do? Will projects be put on hold because the return on investment is too unpredictable? What happens to the dollar? Will Trump cut other taxes to offset his tax hikes on imports? What about the massive budget deficit?
Consumers will pull back, if not right away it will show up with 18 months, though early indications suggest they already are to brace for the price increases as most were already trying to simply get ahead of the last few years of inflation to begin with.
Businesses are already cutting back. My employer has already talked about the impact, I know other people who are saying the same thing. Lots of things going into freeze or slowing down. It will take a minute for this to get through the economy but it absolutely will.
I don’t think this is highly uncertain territory, history has clear examples of what will happen if in doubt. Generally, it’s not good for most, especially consumers or those who have any reliance on foreign material or goods, which nowadays is most businesses and consumers, and the US won’t be able to magically fill that in.
> I think they shouldn't unless they're being disingenuous and politically motivated (push just enough to make the entire Trump mandate an unending crisis until Democrats get back in power).
They've been saying since the Biden administration they are going to keep raising rates. If the Trump regime's choices drive us into an unending crisis, bailing him out with rate cuts would be the politically motivated choice. Continuing to raise rates is just sticking to principles.
That’s a speculative article that was wrong. I was also somewhat misremembering JPow saying he wouldn’t cut rates after the inauguration as him saying he was going to raise them. Rates changed a small amount in September, then they did two big cuts after the election. Not really evidence of political bias in any case.
The gist is that Republicans are going to blame the Fed of playing politics when I terest rates are lowered, and blame Biden for when interest rates rose. Rates go up, Bidens fault, rates go down - politics. That is the republican talking point. The article ascribes no direct motive but says the reduction in rates is due to the fed claiming victory on inflation. Which, was wel down and approaching target when the fed started cutting rates.
It is ironic that an article that says (paraphrasing) "here is what the political talking point would be", be used as __evidence__ for that talking point.
> I don't see anyone mentioning that the United States needs to manage its massive national debt, currently in the trillions, by issuing Treasury securities. These securities mature at varying intervals and require continuous "rolling" or refinancing to pay off old debt with new borrowing.
No one is mentioning this because no one cares, least of all the guy who just signed massive tariffs.
What you're describing is the end result of 30-ish years of Republicans implementing "Read my lips: no new taxes" and this country refusing to have to a mature conversation about revenues. Also, over that period, wages remained stagnant, meaning more people look to the government for assistance, which then costs money in the form of deficit spending. The numerous expensive wars didn't help, either.
There's no good fix to this other than some serious revenue raising through taxes on people who can afford it. Of course, those people are of the opinion that they're entitled to net worths that measure as a significant portion of a trillion dollars, and will simply push the costs onto consumers in order to maintain share prices since that's what most of the net worth sits in.
You have to break those people of that idea. Talk of interest rates, Treasury securities, Federal Reserve policy, it's all just noise. The money going in must be a larger portion of the money going out, and significantly burdening the average American with more tax debt isn't going to solve the problem before causing social upheaval.
> revenue raising through taxes on people who can afford it. Of course, those people are of the opinion that they're entitled to net worths that measure as a significant portion of a trillion dollars
millionaires collectively have more than an order of magnitude more wealth than all billionaires:
> I don't see anyone mentioning that the United States needs to manage its massive national debt, currently in the trillions, by issuing Treasury securities.
It's very hard to even assume that's a concern of the current US administration, based on not only the fundamentalist goal of radically cutting taxes and regulations, coupled with the fact that it's purposely pushing a recessive economic policy that defies any logic or reason.
The very least that you'd expect is a progressive tax policy that didn't excluded corporations and mega-rich. You're not seeing any of that.
The whining about how social security payouts was going to sink America while at the same time handing out tax cuts for corporations hints at a ideologically driven agenda.
I'm sure it has a lot of sources, but it was popularized more recently as a mistranslated Circassian proverb, which caused a Turkish journalist to go to jail and then was picked up by various English news outlets.
Tariffs increase prices. This tends to cause a wage-price spiral, and indeed that's one of the stated objectives (increase US wages by onshoring manufacturing). The increase in prices and wages is inflation. This will cause the Treasury to raise rates to force contraction.
The next consideration is: what is the budget actually going to look like? Is it going to cut spending and leave taxes where they are, resulting in debt paid down, or is it going to be a huge tax giveaway to the top few % while increasing the deficit? (personally I'd bet on the latter)
Then the consideration: other players also get a move. What do the retaliatory tariffs look like? Does cutting off the ability of other countries to earn dollars negatively impact US exports?
Devaluing the dollar against other currencies will also force up rates by the arbitrage principle.
S&P down 4% so far today. Do we think that indicates the measures are good or bad for US industries?
Tariffs don’t increase jobs. Pretty much all Econ lit shows it lowering jobs, the same way it did during Trump I term and same as Smoot Hawley. It also moves manufacturing offshore for the same reasons Harley Davidson moved them to Europe last time - expensive materials here means expensive goods.
Next, since more expensive goods means less sales (see Ford last time), less is sold, so less workers are needed. Last Trump tariffs led to record farmer bankruptcies for a good economy, it led to ~300k manufacturing jobs loss compared to not having the tariffs, and MI had entered a manufacturing recession right before COVID hit.
If tariffs did even a fraction of the good Trump claims, they be used extensively by every country, by every state, by every manufacturer, etc.
Playing in a 21st century economy with long discredited 15th century tools will end as expected.
I know there is a crowd that talks about debt alot and these are all legitimate concerns
However they could also raise taxes on capital gains and top end income brackets - which are at ludicrously low levels for folks of significant wealth - which would go a very long way here. Some estimates suggest it could put the US back in a surplus quite quickly
edit: I'm saying there is an argument for raising taxes. I don't think its off the table like some people suggest. I know it may not be popular with some but we could discuss the merits.
Cutting fundamental government services feels wrong too
The problem is that raising top end rates don't go far enough. It's a start, but we also need to raise the lower rates to solve the problem. That, or dramatically cut benefits.
I don't think broader tax increases are off the table either, but we haven't even attempted to simply close up the loopholes used by corporations and the ultra wealthy and raise taxes in kind. Once that happens, I think its fair to reassess what to do with any lingering problems of raising revenue.
It's been argued a lot that such a move would cause a good portion of American billionaires to just pack up and move to another country. Rich people are mobile in a way that poor people are not.
Believe it or not but there are Americans who relinquish their passport precisely because of this reason.
Patriotism is automatically assumed but we live in a globalised world.
The US is fairly unique in imposing an "expatriation" tax precisely to avoid this situation. The IRS taxes all of their assets as if sold on the day before expatriation.
Of course collecting taxes internationally is difficult, but anyone wealthy enough to meet the criteria will probably need to visit the US at some point.
Most of the times I've heard of it happening it's someone who's net worth is well below the threshold for this (indeed well below the threshold where they actually need to pay any income tax to the US government), but because of the headache of needing to file the paperwork and the fact that a lot of banks don't want to deal with US citizens due to extra requirements imposed on them by the US government (via its financial system).
The USA is not unique but member of a very exclusive club. The other member is the enlightened dictatorship of Eritrea. And, IIRC, Trump promised to abolish this taxation during his campaign. I'm not holding my breath.
I don't think its that simple and is overly simplistic. If it was all about getting a better deal why wouldn't they have all left for Switzerland by now? Objectively, its a better deal than what the US offers - even on tax rates.
Just within the US you could ask why wealthy people aren't all moving to states without any income taxes more frequently. Plenty do move to certain low tax states but network effects, infrastructure, stability, well-understood regulations, etc., seem to often play a bigger role.
Everyone has their own tipping point. Just as salary isn't the only reason to move job, taxes aren't the only reason to stay. But at some point, people move. And the US makes you pay tax overseas anyway, so you can't just move and re-domicile. You have to emigrate and gain citizenship elsewhere.
Where does their income come from? (e.g. investment growth, etc.)
Can't you basically tax their income, and quadruple that tax if they move abroad and want to move their money out of the U.S.?
(I'm guessing it's not easy, but I also guess the reason it's not done is because the ultra rich have so much influence on the politicians and tax code... not for whatever other logistical reasons might exist.)
Plus, if you do that you're a frigging communist. On the other hand, it's so much better to call neighbors, allies and everyone else people pillaging/raping the country. People like drama :)
If the billionaires pack up and move to another country, then those who are willing to pay their due taxes and operate with a lesser profit margin would take the place they left in the market. There is no need to oblige sociopathic profiteers because they threaten to leave.
And, where will they go, really? There are considerable taxes in every country that billionaires would consider. And if they choose to cram into some small island tax haven in the Caribbean, the US can easily pressure that tax haven to do anything it wants.
A) The Fed & Treasury have the ability to buy back the securities at any time if they wanted, since they can basically poof the currency into existence. And t-bonds are as good as cash anyways, so that money is basically already in the economy.
B) The country's national debt is also our citizens' savings accounts. Every major company in the country (and the gov't itself) holds an absurd amount of t-bonds because its the best place to store billions of dollars for safe keeping. Paying off the debt means this capital needs to go somewhere. Should it go to China? The EU? Canada? American real estate?
The national debt is probably the most misunderstood concept in the country. It's denominated in USD, unlike other countries, whose debt is borrowed in currencies they don't control. And "paying off" the national debt risks capital flight and/or asset bubbles - both of which are detrimental to the economy.
The system we have in place is a good one.
Thought experiment: consider what would happen if the US Treasury decided interest rates are negative. That is, you pay $10,000 for a bond and receive back $9,900 after 10 years. What do you think this would do to the economy?
Now ratchet up that negative rate to 100%, that is, you pay $10k for a t-bond and eventually it's worth $0 after 10 years. That's pretty much what paying off the national debt would do (in fact, that's probably how the national debt would be paid off, if ordered to do so, the fed would purchase these bonds and the treasury would use the proceeds to buy existing bonds off the open market). It's two sides to the same coin, but instead of prohibiting the purchase of t-bonds, you just disincentivize it.
All I know about this issue is what you wrote above, but it sounds to me like the US taxpayer is paying interest on bonds so that bond holders can earn interest.
I think its perfectly reasonable for the taxpayer to say they would rather not pay interest on those loans. The bond holder could lend the money somebody else instead.
In fact, I think its really unfair that one generation of people can leave debt behind for future generations to pay with higher taxes.
In the long term, yes. In the medium term, companies and people liquidating their assets and paying capital gains tax actually gives the state a windfall.
Many critical flaws. Your getting lost confusing the forest for the trees.
For starters you are focusing on the % on the interest payments which is a line item. However when all of your allies stop buying your goods and services you run into bigger problems.
Bonus problem: If one of your internal metrics is that you want to have a trade deficit but nobody to sell to because you have created a hostile environment for trade.
The flaw is that the USD is massively dropping because of the tarifs.
This will push up interest rates on US bonds, because bond holders want compensation for the value loss of their bond.
> The flaw is that the USD is massively dropping because of the tarifs.
That's all but certain. Currently it's dropping, but long-term it might as well rise, as the demand for foreign currencies from US importers (and by extension consumers) will go down.
> This will push up interest rates on US bonds, because bond holders want compensation for the value loss of their bond.
How do existing bondholders get to demand anything? They may want compensation for a reduced market value, but nobody owes them that. Fluctuating market values are part of the deal of buying bonds.
Existing bondholders can't demand anything of course. But the bond price is determined by buyers and sellers. With dropping USD, buyers will pay a lower price for the bonds, i.e. the yield will go up.
We mostly abandoned the long-term viability of that in the Bush years with the tax cuts plus expensive wars, and doubled down in Trump's first term (more tax cuts). That exhausted our margin for responsible emergency debt spending, and we had two crises on top of it (as always happens from time to time) so we were down to just playing for time and hoping for a way to spread out the pain rather than let it hit all at once.
We now do not appear to even be playing for time and are rushing toward the "all at once" thing.
Can totally happen when the people in charge are economically illiterate and surrounded by sycophants or crooks (I'm not sure which Mugabe was), demanding a wealth transfer that can't be funded by the actual economy.
Inflation can also happen when production goes down, not just when money supply goes up.
Now I don't claim to be an expert at economics, I'm just a software nerd like most here and may be wrong so take with a pinch of salt, but the things I've heard that are associated with stagflation include de-globalisation and supply chain shocks (e.g. a trade war with major partners), tariffs, and shrinking labor force (aging population not helped by a combination of low immigration and aggressive deportation).
To even begin to understand Mugabe you have to understand his very long and strong relationship with the Chinese military and the reasons why they invested so heavily in his posse.
Yes, but if they let get into a debt spiral, the only solution becomes devaluation of the dollar to the point of hyperinflation. Only then debt is reduced, but it would be terrible for everybody except a few.
-> Treasuries are considered safe during such crisis.
Is that truly still the case? Does the world consider the US stable right now?
I am astonished at how effectively the administration has blown up every pillar upholding the US economy, short, medium, and long term. The damage done here is incalculable. In all of human history never has so much wealth been destroyed so quickly.
I don't see any way the actions we've already seen haven't moved up drastic action on the US debt by at least a decade. And it's only been a very-few months.
We were probably screwed when we cut taxes going into two crushingly-expensive wars, and certainly were when we cut taxes again, but now we're rushing toward crisis instead of trying to at least delay it.
A plan like that could backfire, as one of the primary things that the Fed looks at when setting interest rates is inflation. Increasing the costs of imports across the board will likely increase inflation, which would make a rate cut less likely.
But in general, I think this is too complicated. The simpler explanation for all this is the Executive branch is currently held by isolationist.
Wealth tax is a nice idea but non-starter in implementation.
It works in real estate (property taxes are wealth taxes) because the land can’t move.
One way to tax the super rich is to tax loans against assets. They don’t sell assets to buy a yacht, but borrow against them to avoid paying taxes and keep future gains. Tax those loans as if they sold assets.
We're clearly throwing all pre-Trump orthodoxy out the window at this point, so maybe we'll see PRC-style capital controls, though with essentially no white collar crime being prosecuted for the foreseeable future, enforcement might be tough. OTOH the threat of being "deported" to El Salvador can be a powerful motivator to stay in line.
Instead of throwing around historically illiterate analogies, let's talk about the real issues:
What are the actual inflationary risks right now given the state of the economy? What are the costs of not spending (i.e., austerity)?
Because history also shows – very clearly – that austerity imposed due to debt panic in countries that could have afforded to spend is often way more damaging than the debt itself.
The "printing money" quip misunderstands how modern monetary systems operate. The Fed doesn't just "print money" - it has only two real tools: buying and selling assets, and raising/lowering interest rates.
this SHOULD be really obvious to those in charge, but I think is too subtle for them, or they're willfully ignoring it for the "trade deficit" narrative. I don't see how the end result is not a decline in the global role of the US and a whole bunch of pain for everybody as this all unwinds. All for the hubris of an old man...
> the United States needs to manage its massive national debt,
> The present uncertainty around tariffs and a potential crisis could create conditions that pressure interest rates downward before those Treasury securities mature, by influencing Federal Reserve policy.
> What are the flaws in this thinking?
Flaw #1:
Massive treasury rollovers isn't new.
22% of all Treasuries have a duration of 1 year or less.
The only new thing is that rates have gone up.
Uncertainty is a short term solution to a long term problem.
Flaw #2:
Economic uncertainty and supply side shocks risks a recession.
Recessions usually increase national debt.
Flaw #3:
The right answer to reducing national debt is to ensure incomes exceed outgoings.
The current administration is so focused on extending trillion dollar tax cuts, no amount of tariffs or government efficiency is going to lower the national debt.
Flaw #4:
Treasuries only really go down during a recession.
Recessions are bad, not good.
If you think finding a tech job is hard now, or that your RSUs are hurting, wait until you see a serious recession.
The flaw is that it's like setting your house on fire because it's cold outside. It may well achieve your goal in the short term, but it won't last, and it's just going to make things much worse in the longer term.
It is like that indeed. It should be apparent to anyone who has listened to Trump that he is indeed a conplete asshole. There shouldn’t be any need to go into details.
Likewise, it should be apparent to anyone with a cursory understanding of economics that tariffs are bad for the economy, and imposing mindless tariffs on the entire world is really bad for the economy. “Crash the economy to address the national debt” is a bad plan.
> Likewise, it should be apparent to anyone with a cursory understanding of economics
Can you explain why countries have tariffs if tariffs are bad for their economies as a general principle? I'm assuming you're not the standard sort who thinks Trump invented tariffs.
To protect local industries which create higher prices. Smaller countries do this to protect jobs from economies of scale but pay a price and have a lower standard of living.
> Can you explain why countries have tariffs if tariffs are bad for their economies as a general principle?
Primarily special interest groups. e.g. You have a hundred people, everyone loses 1% of their salary due to tariffs, but one person retains 90% of the tariffs and the remaining 10% is lost. The net result is negative, most people don't care much about the 1%, but the one winner is vociferously against losing his entire income.
Because people largely believe what they want to believe, and people are flawed, especially politicians. Is that sufficient or do I need to go into detail?
Trump didn’t invent tariffs nor did he invent being an idiotic leader enacting policies that hurt his country.
One thing I am not sure about is how much reluctance foreign holders of US treasuries will have to buy more treasuries. My guess is both foreign government and commercial holdings will edge down quite a bit, even without any reciprocal activity. Just because they will have reduced US reserves, and in effect need for treasuries.
God knows what happens if reciprocal activity starts towards using another currency also for global trade.
> Increased demand for Treasuries pushes their prices up and yields down, effectively lowering interest rates.
> What are the flaws in this thinking?
Not sure why international investors would want to buy more t-bonds when the country issuing them is starting a trade war and their money could effectively be locked abroad.
If the Trump admin's goal were to reduce the national debt it would make way more sense to use fiscal policy (increase taxes) rather than some roundabout way to force the Fed's hand on monetary policy. The tariffs do basically function as a massive regressive tax increase in the form of a sales tax, but that comes with truly immense risks on the demand side of the economy. Guess what happens to tax revenue during a recession.
I'll believe it when I see a bill pass the House. But this adminstration loves to make bold claims about what it's going to accomplish without gathering the necessary votes in the House, where it could most certainly push a bill through. News articles don't count.
The key, IMHO, is to maintain the status quo of the USD as the safe haven which also has the ability to destroy other safe havens. As long as the USD is the primary safe have the amount of debt is irrelevant.
> The cost of servicing this debt — paying interest rather than reducing principal — is already a major budget item, surpassing Medicare, approaching Defense and Social Security levels.
Military ("defense") expenditures are always understated. Over $180 billion in veteran's benefits were paid last year. This is not counted as military expenditures. Also the debt you talk about is to not only pay for the money sent to Israel and the Ukraine last year, but still for the adventures in Afghanistan, Iraq etc. That just becomes generic debt in the skewed analysis, alienated from its past military adventures. The military budget is higher than stated.
Fed rate influences treasury rates, but it's not a direct impact. If creditors lose faith in our fiscal situation, rates will rise no matter what the Fed does.
Trump is a wildcard, but I could see the US defaulting on its debt, probably in some way that focuses the default burden on foreign countries holding US debt with some relief for domestic holders. I would definitely not be holding it over the coming few years.
Defaulting on the US debt would send the US into hyperinflation and likely the end of the US.
The US sells debt to US and world investors, at good rates (a few percent), and continually rolls over past debt with new issues. The US spends around 11% of budget on interest on this debt.
A default means the world stops lending at low rates. Triple rates triples the interest payments to 33% of the budget. There’s no possible way the govt will collect that much more, especially as the economy craters, and no group would likely cut all the benefits, since they’d simply get in-elected. So we’d do what countless other countries did throughout history: we’d print money to pay the bills.
Of course this devalues each dollar, so this accelerates, and there would be a massive implosion as the US gets cannibalized by whomever can extract value the quickest.
> Treasuries are considered safe during such crisis.
No. Not during such crisis. It's already visible in prices of traditional safe havens (those based on US credibility) that this crisis isn't like the others. They are dropping like flies. Only gold remains.
I agree with you. To just offer a counterpoint, I sometimes see quotes like this one:
But plenty of economists looked at the economic hole left by the 2008 financial crisis,
and concluded the stimulus policies on the table weren't nearly big enough to fill it.
The size of the hole is all that matters.
Whatever level of deficit spending is required to fill it is the right level of deficit spending.[1]
or this one:
We need the government to be out there borrowing money because of the long-term investments it's making in our economy[2]
The line of reasoning seems to be
1) The government is special because it can go to extreme measures to repay loans if necessary (i.e., print more money or raise taxes)
2) The reliability of the government means that it can borrow at a low rate (say, 3%) and make investments that are worth far more than that (say, 10%).
Put those together, and the government's borrowing amounts to a net benefit to society.
This argument reminds me of the 'then a miracle occurs' comic [3]. It doesn't hold water because
1) The extreme measures are very harmful - they cause high inflation and hardship amongst taxpayers.
2) Even if we accept that government investment makes a good return (a highly questionable assertion), that return does not go to the government. If the government borrows money to build a new road, then there is no doubt some economic benefit, but the government does not receive that benefit, and they are on the hook for the repayment anyway. So government spending does represent a pure cost - not an "investment". And in any case, interest payments represent investment that can no longer happen.
I would also point out that back when we ran briefly ran a surplus in the late 1990s, economists were not exclaiming about how terrible this was, or how paying off the debt represented a missed opportunity or a catastophe in the making. Everyone agreed at that time that surpluses were good, and that paying down the debt was good. The current "this is fine" thinking smacks of economists who have a predisposition to accept and justify the status quo, whether it is objectively good or not.
So all of that is to say that I'm with you - government debt is bad. We are in danger of some combination of insolvency, default, or very high inflation. And once we enter that spiral it will be impossible to get out of it without permanent damage to the economy and the global standing of the US (such as it is).
> I would also point out that back when we ran briefly ran a surplus in the late 1990s, economists were not exclaiming about how terrible this was, or how paying off the debt represented a missed opportunity or a catastophe in the making. Everyone agreed at that time that surpluses were good, and that paying down the debt was good. The current "this is fine" thinking smacks of economists who have a predisposition to accept and justify the status quo, whether it is objectively good or not.
Oh? I remember all the teeth mashing about all those funds who have to buy treasuries and now what are they gonna doooo! And how this is unprecedented and how are the markets going to reacccct! Numerous articles about that sort of thing in The Economist and various other outlets.
> but the government does not receive that benefit
Yes it does, through increased tax revenues due to the increased economic activity brought about by the road existing earlier than it would have if the government had to wait several years to save up the money to build that road.
Also, at least in the US, the government is nominally "We the People," so if the general population experiences increased economic activity, then the government is benefiting, as it exists (nominally) for the benefit of the people.
That's a flavor of trickle-down economics that I would like to see research around. If the state borrows $100m to widen a highway today, versus $100m to widen it five years from now without borrowing - then do those extra lanes really bring in tax revenue equal to the interest on $100m within five years? Will the government responsibly retire the debt using the extra tax revenue, plus the money it was going to have to save anyway? Or will politicians just approve another round of borrowing, let the interest accrue, and spend the collected tax benefit from the road on some other project?
Your point about the government being 'we the people' is fair, but the general population experiencing increased economic activity does not pay off the debt unless the government is disciplined enough to use that activity toward that purpose. Also I'll quibble that the phrase "We the People" in the US Constitution is a statement that We, the actual humans of this country, are deciding to create a government to serve us. The government is a creature created by the people, but it is not the people.
This is just delusional. Everybody is looking for some reason that makes this less stupid than it looks, but there is none.
Intentionally causing a recession to lower the debt burden makes no sense, neither politically nor economically. Besides that the US is not some third world country that issues debt in a currency they have no sovereignty over.
A progressive wealth tax starting at 2% on net worth from $50 million to $250 million and increasing to 8% for wealth over $10 billion is projected to raise $4.35 trillion over 10 years.
Seems like a great start to me.
Alas, I'll never understand people who make average wages defending billionaire wealth hoarding.
>The F-35 jet will cost over $1.5 Trillion, doesn't work and won't be used
You've bought literal Russian propaganda hook, line, and sinker.
The F35 is an incredible piece of technology.
Do you remember infamous articles saying it couldn't dogfight? Not only were those stupid propaganda (you can't dogfight at 100km engagement ranges), all the people repeating them seemed to miss the comment by the older aircraft pilot that the radar assisted gunsight on their gen 4 fighter could not track the F35!, not even at knife fighting range. Go lookup how good gunnery was in WW2 if you want to understand how hilariously bad that is for gen 4 fighters.
The F35 is pricey to run, $40k an hour, but so was the F14, which is correctly understood to be a high tech masterpiece, a tech platform, and one of the best aircraft ever made.
We've already built 1000s of them, and they are already being used today. Israel's attack on Iran that showed just how impotent soviet era air defenses are was conducted with f35s.
"Israel used more than 100 aircraft, carrying fewer than 100 munitions, and with no aircraft getting within 100 miles of the target in the first wave, and that took down nearly the entirety of Iran's air-defense system,"
It's a very impressive machine, that everyone wants, and China is really rushing to build something competitive.
>There are nearly 1,000 BILLIONAIRES in the US, the debt is their problem, they can pay more taxes until it's down to a number you like.
150% correct. The USA is stupidly wealthy on the world stage. We don't have to play pretend poverty, if we would tax the people who have hoarded all that wealth.
Also, the now $2 trillion is the total program cost. It is development, cost to buy 2500 aircraft at $80-120 million each. Mostly, it is the maintenance cost for aircraft for decades of future service. The program cost is spread out over decades.
The important thing is that if the US wants to have air forces, it needs fighters and needs to replace the current ones. The F-35 is better and similar price to older fighters so it is the best option to replace them.
The F-35 does work, and is deployed around the world right now including the middle east for the recent houthi operations.
National debt is absolutely a problem when interest payments crowd out the rest of your budget. Interest payments currently comprise about 17% of the budget, and this is set to grow. Those can only be paid with taxes or inflation, both of which hit joe taxpayer.
I think what’s happening backstage in this magic show are desperate moves to recapitalize the country. Foreign and domestic investors are pledging to spend trillions, probably under duress. Stocks are being crashed to create a flight to treasuries. Dollars are partially anchored to crypto by so-called stable coins. Federal assets are getting dumped and operating costs cut.
Maybe we will get out of this without having to survive on cat food, but I’m not holding my breath.
Significant rollovers are expected from April through September 2025, with additional short-term maturities due by June.
Higher interest rates significantly complicate US' ability to refinance. The cost of servicing this debt — paying interest rather than reducing principal — is already a major budget item, surpassing Medicare, approaching Defense and Social Security levels.
If rates don't come down soon it locks in higher costs for years. The country is at risk of a debt spiral.
How can rates come down? The present uncertainty around tariffs and a potential crisis could create conditions that pressure interest rates downward before those Treasury securities mature, by influencing Federal Reserve policy.
Treasuries are considered safe during such crisis. Increased demand for Treasuries pushes their prices up and yields down, effectively lowering interest rates.
What are the flaws in this thinking?