Latest Inflation Numbers and Discussion

[pb4uski]

Heh, heh, just wait until that happens to our gummint. (Biggest budget item could soon be servicing our massive debt.)

Well, if facts just happen to make any difference for ya:

In fiscal year 2023, the United States government is projected to spend $726 billion on interest payments on the national debt. This is about 14% of the total federal budget of $5.2 trillion.

The interest rate on the national debt is currently about 2.07%. This is relatively low compared to historical levels, but it is still higher than the rate of inflation. As a result, the government is paying more to borrow money than it is actually getting back in terms of purchasing power.

The Congressional Budget Office (CBO) projects that interest payments on the national debt will continue to grow in the coming years. By 2033, they are projected to reach $1.1 trillion, or 18% of the total federal budget. ...

 

[Koolau]

Well, if facts just happen to make any difference for ya:

Predictions are lots of fun. Reality may not be so much fun. I guess we'll see.

 

[CaptTom]

...The interest rate on the national debt is currently about 2.07%. This is relatively low compared to historical levels, but it is still higher than the rate of inflation...

Wait, when was this written? Inflation is lower than 2.07%? Is that some sort of long-term average of previous years?

Without that context, it does seem to support the skepticism some of us have been expressing about published inflation figures.

I have a lot less personal experience with national debt than with inflation, but it does seem like those figures can also be spun to support different opinions. I tend to dismiss the most extreme positions, but for all I know either extreme could be correct.

 

[pb4uski]

Wait, when was this written? Inflation is lower than 2.07%? Is that some sort of long-term average of previous years?

Without that context, it does seem to support the skepticism some of us have been expressing about published inflation figures.

I have a lot less personal experience with national debt than with inflation, but it does seem like those figures can also be spun to support different opinions. I tend to dismiss the most extreme positions, but for all I know either extreme could be correct.

I agree that the inflation part doesn't sound right, at least with respect to current inflation, but the 2.07% average interest rate is correct. Perhaps the inflation was a long term average.

But the main point was that the average interest rate on the debt is a modest 2.07% and Koolau's hypothesis that interest could become the biggest budget item was far-fetched... or I guess in your nomenclature, an "extreme position".

https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/

 

[Montecfo]

Pb4uski,

Forgive me but I am not following your point. Are you expressing a view that the debt is manageable because it is low rate?

 

[explanade]

Powell said this morning that inflation is still too high and more rate increases are still on the table.

 

[Montecfo]

Powell said this morning that inflation is still too high and more rate increases are still on the table.

No shock. And said there are risks to hiking too much and hiking too little. And said prior hikes have not had time to affect the market yet. He said they would have to "proceed carefully" on further rate hikes or whether to hold off.

I thought he was pretty balanced all things considered.

 

[Mulligan]

I agree that the inflation part doesn't sound right, at least with respect to current inflation, but the 2.07% average interest rate is correct. Perhaps the inflation was a long term average.

But the main point was that the average interest rate on the debt is a modest 2.07% and Koolau's hypothesis that interest could become the biggest budget item was far-fetched... or I guess in your nomenclature, an "extreme position".

https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/

But its not like the Govt loaded up on 10 and 30 year debt at record low rates. Each year debt will need to be rolled over and more issued from deficits. You wont see that 2.07% ave. next year I bet.

 

[Mulligan]

But its not like the Govt loaded up on 10 and 30 year debt at record low rates. Each year debt will need to be rolled over and more issued from deficits. You wont see that 2.07% ave. next year I bet.

If this is to be trusted….

The current maturity structure is such that most of the current debt will mature within the next three years. Thirty percent of this outstanding debt, amounting to $6.7 trillion, will mature and need to be refinanced during fiscal 2023. An additional $300 billion in floating-rate debt, while not maturing during fiscal 2023, pays interest rates that will reset with market rates during that year. An additional $2.5 trillion in debt maturing during 2023 will make coupon and principal payments that will be adjusted based on the inflation rate prevailing at that time…

As an example, almost $7 trillion worth of debt held by the public will need to be refinanced during the 2023 fiscal year. Each percentage point increase in interest rates on that refinanced debt will mean $70 billion per year more in net interest payments in that first year, or about 10 percent of the United States defense budget requested for 2023.

https://econofact.org/rising-costs-of-financing-u-s-government-debt

 

[MichaelB]

But its not like the Govt loaded up on 10 and 30 year debt at record low rates. Each year debt will need to be rolled over and more issued from deficits. You wont see that 2.07% ave. next year I bet.

Yes indeed. The average rate is already starting to head up and will continue to do so for some time. The debt service cost as a % of total budget has also turned and is heading up. The total debt will be increasingly more expensive to service.

This probably will help contain inflation. As more of the budget is needed to service the debt less is available for spending on goods and services, and this will effectively reduce demand.

 

[JoeWras]

Yes indeed. The average rate is already starting to head up and will continue to do so for some time. The debt service cost as a % of total budget has also turned and is heading up. The total debt will be increasingly more expensive to service.

This probably will help contain inflation. As more of the budget is needed to service the debt less is available for spending on goods and services, and this will effectively reduce demand.

Is it though? Doesn't Congress grant bills like IRA with solid numbers? IRA is just starting. There's a lot of money in that pipeline, and I don't think it is tied up with debt service. Or is it?

 

[MichaelB]

Is it though? Doesn't Congress grant bills like IRA with solid numbers? IRA is just starting. There's a lot of money in that pipeline, and I don't think it is tied up with debt service. Or is it?

I hope I didn’t open a pandora’s box with my previous post, my intent was to keep it linked to the thread topic, which is inflation. As the cost of debt service rises there is less left over for spending on goods and services. If debt service costs rise and real spending also rises, the outcome will be different, and unpleasant, and probably highly inflationary. That’s some time down the road, however.

For now, back to pb4uski’s point, the debt service cost is low. It also does not change abruptly.

 

[JoeWras]

I hope I didn’t open a pandora’s box with my previous post, my intent was to keep it linked to the thread topic, which is inflation. As the cost of debt service rises there is less left over for spending on goods and services. If debt service costs rise and real spending also rises, the outcome will be different, and unpleasant, and probably highly inflationary. That’s some time down the road, however.

For now, back to pb4uski’s point, the debt service cost is low. It also does not change abruptly.

Ah, no worries. Close the box.

Long term view (versus my short term view). Got it.

 

[Chuckanut]

If this is to be trusted….

The current maturity structure is such that most of the current debt will mature within the next three years. Thirty percent of this outstanding debt, amounting to $6.7 trillion, will mature and need to be refinanced during fiscal 2023. An additional $300 billion in floating-rate debt, while not maturing during fiscal 2023, pays interest rates that will reset with market rates during that year. An additional $2.5 trillion in debt maturing during 2023 will make coupon and principal payments that will be adjusted based on the inflation rate prevailing at that time…

As an example, almost $7 trillion worth of debt held by the public will need to be refinanced during the 2023 fiscal year. Each percentage point increase in interest rates on that refinanced debt will mean $70 billion per year more in net interest payments in that first year, or about 10 percent of the United States defense budget requested for 2023.

https://econofact.org/rising-costs-of-financing-u-s-government-debt

The implication is that the experts who run the government funding department are not as smart as Joe and Jane Homeowner who jumped on those 2-4% 30 year mortgages we had a while back. Or do they know something Joe and Jane don't know? I don't know.

 

[pb4uski]

Pb4uski,

Forgive me but I am not following your point. Are you expressing a view that the debt is manageable because it is low rate?

No, I'm not opining on whether the debt is manageable or not at all. I'm just saying to claim that interest expense could become the "biggest budget item" as Koolau posted is poppycock. The reality isn't even close if you look at the numbers.

 

[Montecfo]

Well let's hope that does not happen. If we, the people, demand it fixed it can be.

We have to vote accordingly.

 

[pb4uski]

But its not like the Govt loaded up on 10 and 30 year debt at record low rates. Each year debt will need to be rolled over and more issued from deficits. You wont see that 2.07% ave. next year I bet.

True, I'm sure the weighted average rate will be much higher and it is shameful that the government didn't issue more long term bonds when rates were low.

 

[pb4uski]

The implication is that the experts who run the government funding department are not as smart as Joe and Jane Homeowner who jumped on those 2-4% 30 year mortgages we had a while back. Or do they know something Joe and Jane don't know? I don't know.

It's not like Joe and Jane Homeowner would opt for a 3, 5 or 10 year mortgage over a 30 year mortgage.

 

[eytonxav]

I agree that the inflation part doesn't sound right, at least with respect to current inflation, but the 2.07% average interest rate is correct. Perhaps the inflation was a long term average.

But the main point was that the average interest rate on the debt is a modest 2.07% and Koolau's hypothesis that interest could become the biggest budget item was far-fetched... or I guess in your nomenclature, an "extreme position".

https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/

Definitely low due to the time period, but the future is not exactly looking rosy according CBO when looking at net interest as a % of revenue:

 

[pb4uski]

I agree that the future isn't looking rosy and something needs to be done and the sooner the better... the only point was that the claim that it would be the biggest item in the budget soon was incorrect based on the data.

 

[MichaelB]

True, I'm sure the weighted average rate will be much higher and it is shameful that the government didn't issue more long term bonds when rates were low.

The weighted average maturity of US Treasury debt rose slowly but steadily for the decade preceding the pandemic. It dropped sharply at the onset of the pandemic, but a year or so later recovered. It’s now at a 20 year high.

It’s not at all clear there is sufficient market demand for more long term US Treasury debt, at least at the interest rates we were seeing a couple of years ago. Long term debt is highly illiquid and demand for Treasuries is mostly from the financial sector where highly liquid issues are a requirement.

Here’s a short overview https://www.pgpf.org/blog/2023/08/how-does-the-treasury-issue-debt

 

[pb4uski]

^^^ Interesting. I have to wonder how the demise of defined benefit pensions impacted the demand for long term treasuries. A pension plan would be more willing to invest in long-term treasuries to match their long term pension obligations.

 

[MichaelB]

^^^ Interesting. I have to wonder how the demise of defined benefit pensions impacted the demand for long term treasuries. A pension plan would be more willing to invest in long-term treasuries to match their long term pension obligations.

Good point. I imagine that as long term rates rise there will be more interest in longer term maturities, especially from insurers, pension funds and other institutional investors.

 

[audreyh1]

The long maturities - wouldn’t these be heavily used by annuities and other insurance products like LTC?

I know a lot of pension plans invest in equities including hedge funds and private equity but maybe that’s more before retirement. I suppose many buy annuities for the retiree?

If demand for long term treasuries were low, it seems long rates would be higher?

What about foreign ownership of US Treasuries?

From earlier this year shows relative ownership of US treasury securities, historical graph. Federal Reserve portion is included in US Govt portion here, some other places it is broken out. Foreign holdings are a large percentage. From https://www.thebalancemoney.com/who...c debt is held by,the most, followed by China. which in turn references a December 22 Treasury report.

 

[Chuckanut]

It's not like Joe and Jane Homeowner would opt for a 3, 5 or 10 year mortgage over a 30 year mortgage.

True and a good point. But many homeowners did refinance to get lower rates. I know of people who refinanced twice and ended up with a 15 year low 2% mortgage loan. If the government did the equivalent back then, I missed it.