Can the Government Even Pay the Rising Interest Expense on its Gigantic Debt as the Fed Pushes up Rates? Yes. Here’s Why

Higher rates eventually enforce a sort of discipline on the drunken party in government and even in the private sector. That would be a good thing.

By Wolf Richter for WOLF STREET.

There has been a lot of hand-wringing recently among the tightening deniers. They’re now saying, in their latest barrage, that the Fed can never raise its policy rates above x%, such as 2% or whatever, because the government can never pay those higher interest rates on its huge debt and will go bankrupt. And look, they say, interest payments already jumped, and no way that the government can pay much more than that.

In Q1, federal interest payments on its debt jumped by 11.7% year-over-year to $140 billion. OK, they’re still down a bunch from the peak in Q2 2019 of $147 billion, but you kinda get the idea of what they’re saying:

So let’s take a look.

Only newly issued debt carries the new interest rates. Existing bonds pay the same interest they’ve always paid, until they mature. There are some exceptions, such as Series I Savings Bonds (the I-bonds folks can buy directly from the government), TIPS, floating rate notes, etc. But for most part, Treasury securities pay the interest at which they were issued until they mature. At that point, they’re replaced with new debt, and this new debt comes with the current interest.

It’s not the $30.5 trillion in total government debt that will suddenly cost more as interest rates rise, but only newly issued debt. So this higher interest expense will spread only gradually over the debt.

Interest expense increased sharply because of the spike in debt. Since March 2020, the gross national debt spiked by $7 trillion, or by 30%, from $23.5 trillion in March to 2020, to $30.5 trillion currently.

The spike in the debt of the Federal government since March 2020 is just stunning. But it slowed in 2022 and is now back to its pre-pandemic growth rate. Obviously, a spike like this cannot be sustained without some major, let’s say, re-arrangement, such as a big bout of inflation, I mean, oops…

But the burden of interest expense is near historic lows. The government’s tax revenues rise with GDP and with inflation, because growth in economic activity and profits and wage inflation create higher tax revenues, and the Fed’s creature of asset price inflation created higher capital gains tax revenues, though they will go into a tailspin as assets are being repriced under QT and higher rates, and capital gains turn into capital losses.

So interest expense has been rising, but tax revenues have been rising even more quickly along with GDP, and the burden of that interest expense on the US fell to 2.21% of GDP by Q3 2021, the lowest since 1959.

In Q1 2022, interest expense as percent of GDP ticked up to 2.35%, still very near those historic lows. The increase in the percentage was in part due to the decline in GDP in Q1.

In 1985, during the Reagan years, interest payments exceeded 5% of GDP for the first time ever, and they stayed in this 5% range until 1991, when the ratio began to decline, as the lower interest rates were phasing into the debt, and as the economy grew.

For data geeks: The chart is calculated from the actual quarterly interest expense in dollars (not the seasonally adjusted annual rate) divided by quarterly nominal GDP in current dollars (not seasonally adjusted and not inflation adjusted), expressed in percent.

Yield solves all demand problems for debt. Who would want to hold Treasury securities, given this debt and inflation? But here is the thing: If people don’t want to buy 10-year Treasuries at a yield of 3% when inflation is 8%, then yield will have to rise until sellers find a buyer, and at higher yields, the buyers emerge. At some point, a 10-year Treasury paying x% in yield is going to be a great deal, and demand always emerges after some price discovery.

Yield solves those kind of demand problems. And the government will not have any trouble selling new bonds, but they’re going to carry a higher yield – and therefore a higher expense for the government, and higher income for investors.

Higher interest rates enforce discipline. Eventually, higher interest rates combined with ballooning debt levels will push interest expense up to a point where it’s taking more and more of the growing budget, and Congress will have some debates about it, and after some grandstanding and tongue-wagging and taking in the maximum amount of lobbying money, there might even be a compromise on spending and taxes because the only discipline in a capitalist system is the cost of capital.

And if the cost of capital is zero, or is below zero in real terms, and for long enough, then there is no discipline, and the drunken party just keeps going on, and the debt keeps piling up, including in the private sector, until the problem gets solved in another way: Massive inflation, but at a long-lasting and brutal expense to the economy.

Higher interest rates will enforce a sort of discipline on the drunken party, including in the private sector, and will sober up the participants, and prevent the kind of long-lasting destruction that massive inflation wreaks on the economy, and that would be a good thing.

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  282 comments for “Can the Government Even Pay the Rising Interest Expense on its Gigantic Debt as the Fed Pushes up Rates? Yes. Here’s Why

  1. polistra says:

    Thanks. This is an extremely basic fact about real business and real economics.

    Engineers understand how negative feedback works. Economists do their best to guarantee that we will NEVER understand real economics.

    • VintageVNvet says:

      good one poli!!!
      “Economists do their best to guarantee that we will NEVER understand real economics.” Is EXACTLY the truth!!!
      There’s reason it’s called the ”DISMAL…” and although ”science” is the next word in that meme,,, in fact, economics is just as much a ”science” as all the other so called ”social” sciences, which is to say they are NOT science at all, but rather ”aggregated opinion” and nothing more, ,,

      • mife says:

        There is an old joke about this:

        An Engineer, Accountant and an Economist are asked, “What is two plus two?”
        Engineer: “Four”
        Accountant: “Well, it depends on the marginal tax rate you have at the time.”
        Economist: [Closes the door and the blinds and syas with a twinkle in his eye] “What number would you like it to be?”

        • Sams says:

          That remind me about the story about a job interview in the DDR (east Germany). The one that answered 2+2 is what the (communist)party want it to be got the job.

      • Wisdom Seeker says:

        Econ in practice is even less “sciency” than social sciences… even though in principle it’s the most quantitative of them.

        Econ in practice is all about propaganda on behalf of the wealthy, manufacturing public consent for policies counter to the National interest, hyping bubbles to fleece the greater fools among the sheeple, and so on.

        Any Econ-Einstein’s initial search for truth too often gets suborned into a search for wealth and power…. and anyway the crowds too often prefer the eCON-men’s sweet lies to the hard truths.

        The World does not want to be Saved…

    • Marcus Aurelius says:

      Oh, they understand. They fully understand.

      They just look for ways around it.

      Like a spouse cheating.

      Like a drunk driving learning how to not look so drunk driving.

      Like the embezzling employee finding accounting tricks, and P.O. Boxes, and fake invoices. They know exactly what they are doing.

      It is WE who are fooling ourselves. We really don’t want to know the truth. It is far too horrific. We don’t want to be ostracized. We want to go to all the right parties. We want to be included. We don’t want our “conspiracy” comments deleted.

      To speak the truth is to offend. This how you know the world is a lie.

    • Ccat says:

      Layoff! All of you! WRT economics and economists!

      Economists are mathematical modelers of the economy.

      You create a mathematical model, put in some numbers, get out some other numbers, analyse the result.

      Numbers don’t lie, but people lie about the numbers.

  2. DawnsEarlyLight says:

    Wolf, I think you just took some of the worry out of at least half the country.

    • Augustus Frost says:

      Depends upon what you mean by worry.

      At last half the country believes that it’s all essentially “free”.

      That’s not the message of this article.

      Part of the inferred message is that this debt orgy and the interest cost that goes with it means lower future living standards for someone, most.

      And if it isn’t inferred, it should be because that’s what’s going to happen, one way or another. Inflating the debt away isn’t cost free either because it’s someone else’s asset which means these people become poorer.

      Many are going to become poorer because a lot of this debt represents prior misallocation of resources which aren’t unlimited or free.

      There is never something for nothing, ever.

      • Djreef says:

        I found $20 once.

        A friend of mine found $100. I was with her when she found it.

        • Candyman says:

          Ah…but you neglect to see the other half of the equation. Someone LOST $100.00. They paid. Again…nothing is free!

        • COWG says:

          And furthermore…

          Economists would claim that your friend did not produce anything in order to receive that $100…

          In essence, her finding that $100 and putting it her pocket is recessionary…:)

        • Soph says:

          I found a quarter in the parking lot

      • John says:

        Exactly. The inference is Crystal Clear.

      • Edward Meehan says:

        Does not affect the extremely wealthy. They welcome this environment as they knew what was to come and were prepared for the same.

    • cobo says:

      You’ve certainly made it a lot more fun

  3. Phoenix_Ikki says:

    Thank you for clearing this up Wolf. Great info as always and certainly help debunk the baloney that certain financial professional/macro analyst’s claim that FED will need to pivot in Q3 due to government default risk. Sadly his kind of talking points I would expect from MSM but this came from a YT channel that usually have pretty good info and great guests like yourself so perhaps the baloney caught my attention more than usual but remembering what you said before about it being a non-issue, just glad you clear it up again.

    • Harry Houndstooth says:

      As a disclaimer, my wife does not allow television into our house:

      There are actually humans on television predicting that the Fed will make a pivot and stop Qualitative Tightening and pivot to Qualitative Easing?

      • RockHard says:

        YouTube. He’s probably referring to Wealthion interviewing Like Gromen. They published 3 last week that Wolf summarily dismissed in the comments here last week.

        Or ask Wolf again about his opinion, it livens up the comments.

        • Wolf Richter says:

          “Or ask Wolf again about his opinion, it livens up the comments.”


        • Phoenix_Ikki says:

          Yup that’s the one…I definitely got a raise out of Wolf on that one.. Lesson learned :)

        • elbowwilham says:

          Can you link to wolf’s response? I would love to read his rebuttal to some wealthion guests.

        • RockHard says:

          elbowwilham – I don’t think Wolf allows links in the comments.

          “What’s Behind the Collapse of so Many Stocks since Feb 2021?”

          You’ll find it. It’s not a rebuttal, it’s a dismissal. Basically, Luke Gromen thinks that the Fed will blink and start dropping rates. Wolf touched on it above, but has gone into a lot of detail multiple times in the past month, and in short, he thinks Gromen is completely wrong.

          Some of Wealthion’s stuff is good, but in the end they’re producing content and will bring on people just to get clicks. Bear that in mind when you listen to them.

        • cb says:

          @ Wolf –

          I second the request of elbowwilham for a link ……..

          It is amazing the amount of coverage some of these guys like Luke Groman get. There is a whole industry out there where a lot of GURU’s make the rounds, in many cases covering each other.

          I watched an interview of Luke Groman by “Alf”, another GURU. I thought Groman made the point that when debt defaults, you have dollar destruction. Alf did not question the assertion.

          I contend that that is false. Debt default does not result in dollar destruction. The dollars remain in the system.

          Groman is a smart guy and knows a lot.

        • Wolf Richter says:

          When you owe me $100 and then default, it destroys my $100 asset, but it also destroys your $100 liability, with the effect that you’re $100 richer and I’m $100 poorer, and on net in the overall system, nothing changes.

          If people read or see or hear something often enough, they believe it. That’s why I don’t allow people to troll the comments with nonsense over and over again because eventually, people take this as reality.

    • Augustus Frost says:

      All governments borrowing in the national currency can print. Everyone knows that and did. The real question is, what’s it going to be worth when it’s paid back and how will buyers of the debt perceive it.

      The decision to default or “print” is a political choice and I’d say mostly psychological, but differences of opinion exist on this last part.

      Same thing with QE and QT. Market sentiment moved against the FRB more recently and FRB sentiment changed with it. The difference is evident with the ECB and BOJ who are still
      behind the curve”. I’m aware why they are (supposedly) doing it but it’s still a choice. They can act otherwise.

      If a central bank insists on acting against market sentiment, the currency is at risk of crashing. That’s the ultimate limitation on any “printing”.

      It’s not a mechanical process because people aren’t robots and have agency.

    • Richard Greene says:

      Interest rates have been low for a while so the right financial move for the goobermint would be borrowing a lot of money with long term bonds to finance spending.

      The debate over the interest is answered here but that’s not the important point. The important point is what the deficit spending is used for.

      Deficit spending, especially with historically low interest rates, encourages reckless spending that seems painless since taxpayers are not seeing higher taxes. Large deficits also encourage the Fed to buy lots of bonds.

      Concerning economics;
      A nation consists of many households. Think of an economic or financial issue for one household. If an economic or financial policy makes sense for one household, it probably makes sense for the entire nation.

      Does it make sense for a household to borrow lots of money at low interest rates to spend recklessly? No. You only get to “live large” for a while. … So it doesn’t make sense for a government to do the same thing. Like we did in 2020 and 2021.

    • Bobber says:

      If they are smart, the Fed won’t pivot until housing has dropped at least 40% in speculative areas, 10% in other areas.. They need to take the froth out of RE markets to reduce inflation.

    • Janus says:

      Yes because we all know how reasonable and responsible our political class is, and how independent the Fed is. These people sent everyone stimulus checks whether they needed it or not, and allowed massive PPP fraud. They propped up the most massive debt bubble in history. Yes, I believe the same people will now find sobriety. /s

  4. rojogrande says:

    Wolf, you may want to keep a link to this article handy. You may need to reference it often in the comments during the coming months and years.

    • Wolf Richter says:

      I think I will post updates on this quarterly. Or at least a couple of times a year. This is something to keep our eyes on.

      • Wes says:

        Yes, maybe in the near future market driven price discovery may just show up unexpectedly.

      • Jay says:

        Looking at the for Average Interest Rates on US Securities (AIRUSS), shows that in January 2001the AIRUSS was 6.59%. By the time the Fed started the last balance sheet runoff, AIRUSS was at 2.49%. About midway through the 12-month runoff, it peaked at 2.59% at the end of April 2019. As you well know, the repo market was in full meltdown mode during this time. Then, it trended downward and hit 1.56% at the end of January this year. The notable drop in quarterly interest expense is nicely captured on your graph starting in 2019. The fiscal data web site only lists through May at 1.73%, so it’s reasonable to think June will end in the ballpark of 1.80%.

        There’s almost $4T in 1 year treasury notes that most certainly will roll over at higher rates. Given that the national debt has grown by $10T since Trump took office, it’s reasonable to think the majority of that debt was borrowed in 3-year or less notes some of which has already been rolled over 2 to 3 times at lower and lower average rates until January of this year. There’s $13.4T in 2-10 year notes & bonds. Let’s make a reasonable assumption, since I can’t find the data, that half of it, $6.7T, is in notes of 3 year of less maturities.

        I don’t see any real numbers in your article that articulates what you predict will happen to the $545B average interest paid on debt over the last four years. But, you do tend to shy away from predictions which is fine. My assumption is that you think it will rise within acceptable limits.

        To me it seems reasonable that the AIRUSS over the next few years will easily top 2.59%. Before April 2019, the last time the AIRUS was 2.59% was at the end of August 2012, approaching 12 years ago. In 2006, the AIRUSS was about 5% and our debt was only $8.5T. Today, our debt is 3.6x higher.

        This is where the real math that’s beyond me due to a lack of data and a really solid understanding. But, if we hit with anything close to late 70’s through early 80’s stagflation, then there’s no telling how high the AIRUSS will go: 4%, 5% or higher? My guess is that any appreciable move above 3% becomes very problematic for the total interest paid on debt. Ultimately, one would wonder if this would give JPowell justification to transform into Volcker and raise rates much higher than people think is possible in order to induce a significant recession, thereby giving creating the needed demand destruction to fairly quickly tame inflation and then lower interest rates back down to .25%. But, everyone knows the math of today’s debt means he can do that. In fact, he can’t even come close to what Volcker did, but the reality is that he doesn’t need 19% FFR to induce a recession. 4% would most likely do the trick, so this is why they know they need to stop at around 3.25 to 3.5%.

        It’s funny how your writeup didn’t get into the real numbers at play here. You’re a smart guy. Now, here’s my challenge. Go back and think about all your reckless Fed ever articles and then “speculate” what happens over the next 3-5 years if JPowell misses the landing by a wide margin, and we’re stuck with stagflation through 2026, meaning IMO inflation averages 5% starting in 2023. And, certainly translate that into projections on annual interest expense over that period, again, IMO where the average rate stays in the 3-4% range.

      • Jay says:

        And, as for increased revenue, what goes up comes down. From 2008 to 2009, Federal revenue decreased $420B or about 17%. In 2021, the estimated tax revenue was $3.86T, so we’re certainly going to push into the low $4T range. A similar 17% drop from say $4.3T would be a loss of $731B. We’ll run a $1T deficit this year. Next year, the deficit in a slowing economy would be at least $1.5T.

        Then 2024 is when things would get dicey, depending on how bad the recession is. By 2024, the Fed may be forced to start QE up simply to push down rates. Today, we all wonder if that will give JPowell enough time to coral inflation back under 5%. But remember, the Biden administration, Russia, the Saudi’s and the US oil producing nations are going to everything they can to keep oil prices high. And we all know that how Europe’s continued move away from Russian fossil fuel supplies do their part in maintaining long-term high prices. And none of this is under the Fed’s mandate.

        If we’re in a deep recession where the average cost of diesel stays close to $4, hello stagflation. $40T x a .25% average cost of debt is $1T a year in interest expense. That seems very reasonable within 5 years. In 5 years, China may very well be on the verge of passing our GDP and have laid out plans publicly on how they plan to usurp the US dollar as the world’s reserve currency.

      • Jay says:

        The crew over at WSJ have a different take. They’ve done the math:

        “Total federal gross interest cost over the 12 months ending on May 31 was $666 billion. If we include the impending extra interest on Treasury bills and the maturing notes, that figure rises to $863 billion. This is a staggering cost.”

        And that’s just one year’s increase. What happens when the recession comes, and inflation is still raging at 6%+ or 3x the Fed’s target? How does QE work in an environment like that?

        They go on to point out that a falling stock market will lower capital-gains tax revenue. They say this is already happening, expecting a $250B shortfall this FY. And, they rightly point out diminished remittances from the Fed to the Treasury.

        But, the best part is saved for last, the vicious cycle of more borrowing and ever-increasing interest expense.

        I guess the answer may lie with what each person, economist or otherwise, thinks we can “afford”. I do agree with you higher yields solve demand problems, but I wonder how much closer this latest spat of grotesque debt assumption has moved the needle towards that eventual “oh crap” moment: loss of confidence in the dollar?

        That’s when it all hits the fan and China will be laughing all the way to the bank and finally invades Tiawan. 3 years? 5 years? 10 years?

        Thanks, Wolf!

        • Wolf Richter says:

          “This is a staggering cost.”

          That’s WHY I GAVE YOU THE NUMBERS so you wouldn’t fall this WSJ BS of “staggering.”

          This $666 billion is the 12-month total, and I agree with that, BUT THAT’S ONLY ABOUT 2.8% OF GDP, HALF of where it was in the 1980s.

          Next year, that “staggering” WSJ $863 billion will be 3.3% of GDP if the economy goes into a run-of-the-mill recession between now and then — with 0% annual growth of real GDP for the year, and 6% growth of nominal GDP due to inflation. If inflation is hotter than 6% or if the economy doesn’t go into a recession, interest expense will be below 3% of GDP, compared to over 5% during the Reagan years.

      • Jay says:

        When we hit $1T in interest in the next 18 months, real GDP will most likely have tumbled to at most $19T. 1/19 is 5.3% of GDP. Likewise, tax revenues will drop below 2021 levels of $3.86T. A good estimate would be $3.8T. Taking 1/3.8, we 26% of total revenue being spent on interest on the debt. That’s scary.

        And as the debt grows ever larger, that % will rise faster, especially IF stagflation remains. Once we hit $1T in annual interest expense, I just can’t imagine Wallstreet, economist, armchair quarterbacks like myself and MSNBC for that matter not taking notice. The Fed & Congress are an entirely different matter. They’ll be concocting ways to QE & profusely spend money to get us out the recession.

        The next 3-5 years could get really scary in terms of what ifs. One would be the GOP takes over and we arrive at the moment where our federal government is fiscally forced into some level of austerity mode.

    • Wisdom Seeker says:


      This debt-sustainability issue is one of the greatest myths out in the wild right now. Killing it will be a huge public service.

      It’d be cool to model interest/GDP ratios under various interest-rate scenarios (e.g. 3% for 5 years…).

      It’s surprising that Fed&FedGov aren’t already publishing / promoting this more, since it’s clear higher rates are needed and minimizing public fear about them would help the economy adjust more smoothly…

      It’d also be interesting to see an interest/GDP series going back a lot further in time. Interest/FederalRevenue would also be informative since FedGov/GDP was smaller prior to current era.

      • rojogrande says:

        “It’s surprising that Fed&FedGov aren’t already publishing / promoting this more, since it’s clear higher rates are needed and minimizing public fear about them would help the economy adjust more smoothly…”

        I agree but think at least one reason why they aren’t promoting it more is the potential downside risk to asset values. If the Fed explained rates are going up significantly and they have no problem doing it from a finance or tax perspective, the immediate market correction might be significant. As it is, they can try to manage the repricing of assets more gradually, because a significant number of market participants believe a pivot is coming in the near future. Ironically, it’s the Fed’s lack of credibility that allows it to say what it will do, actually do what it says, and still have the market propped up to some degree by those anticipating an “inevitable” pivot.

        • Wisdom Seeker says:

          Brilliant – bleeding out markets slowly via slow-fade expectations, rather than triggering a complete crash.

  5. MF says:

    Government spending discipline is anti-inflationary on its own. Dollars are rerouted from being directly spent into the economy to the servicing costs of investors who hoard dollars. It’s a way of reducing the velocity of money, and reduces the need for the Fed to hurry up and mop it all up.

    • Flea says:

      Biggest problem is corporate welfare ,businesses have learned to get handouts or won’t build create jobs , just look at semiconductor industry. Trying to onshore but congress won’t pay up yet ,so they will go to another country.Maybe Ukraine,Russia or China good luck

      • Chris G says:

        Yes, dead on!

        The big Tech behemoths won’t move production to the US without a fat government handout. After years of bank bailouts, low interest rates, Fed liquidity injections, corporate tax cuts, and Covid stimulus programs, what did these companies do?

        They bought back trillion$ in their own stock, kept wages and benefits low for their employees, and instead increased spending on Congressional lobbying to get another handout. End-state Capitalism and bipartisan encouragement by Congress.

        • Harrold says:

          But I was told corporate tax cuts would allow business to build new plants, hire more workers and pay higher wages.

        • Escierto says:

          Yes indeed, Harrold, that’s always the lie that we are told. Tax cuts pay for themselves they say but they never do.

        • Crunchy says:


          Don’t make me Laffer.

      • Nate says:

        There is corporate welfare, and then there are companies just exercising leverage.

        For some industries, there are national security reasons why it’s essential to have production within your borders to ensure supply during geopolitical events. Most of these companies get lots of subsidies because they know this and want to trade their leverage for profit — exs: energy production, automobile production, weapons, and, post-COVID, mRNA-vaccine production and semiconductors .

        COVID taught us that during the bad times, all the normal rules on trade are subject to change. We got screwed on masks by China, most of Europe got screwed on vaccines because India and UK prioritized themselves, China screwed itself because it lagged on mRNA vaccine development, etc.

    • curiouscat says:

      Current velocity of money is astonishingly small. When I was in B school in the mid-80s it was about 10. Now it is about 1.18.

  6. Harry Houndstooth says:

    This is one of the best distillations of truth ever. A prime example of why this web site is sufficient in obtaining financial information.

    Pure wisdom dispensed daily:
    “the only discipline in a capitalist system is the cost of capital”

    In terms of the stock market, the surprises are likely to be on the downside.

  7. Greg says:

    You missed the fact that as interest rates rise so do interest on bank reserves which means the Fed Reserve bond portfolio can and will be operating at a loss, while the interest rate profit received by the Fed Reserve– from treasury bonds and MBS held by the fed– when ZIRP was happening and returned to the treasury will be gone, driving the Federal deficit much higher. How much higher? easily into the hundreds of billions $$$$$!!!

    • Sams says:

      Do not the FED decide the interest rate on bank reserves? The FED never will, but they could enforce negative rates on bank reserves and earn money on the deposits.

      • Greg says:

        Euro zone imposes negative rates on its bank reserves held at the central bank. The European banks are corporate basket-cases that have only gone down for past 20 years. Deutsche bank from 120 to under 10, bnp parabas 266 to 47. Italian and spanish banks are worse with several going banko. So, unless Congress changes the fed reserve act, the fed will keep paying interest to the banks on their reserves. The Fed Res did not and does not want to raise interest rates as they know the damage it will do to the Fed GVT balance sheet and that’s why they have let inflation run hot for 18mos. and continue to do so with an inflationary 1.5% ffr. But when push comes to shove and rates need to go substantially higher the banks balance sheets will be more of a concern than the Fed Gvt balance sheet!

        • Wolf Richter says:


          “The Fed Res did not and does not want to raise interest rates as they know the damage it will do to the Fed GVT balance …”

          It really doesn’t matter what the facts say, tightening-deniers just don’t ever give up. They keep twisting and turning, and exposing themselves to ridicule after ridicule. And yes, Greg, you belong to the group that I ridiculed with this article and in prior articles about rate hikes and QT, and that I will continue to ridicule as the Fed raises rates further and does QT.

        • Marcus Aurelius says:

          An institution that can, at will, create all the currency they want, can never go bankrupt.

          The country? The citizens? That is not the concern of the Fed. This Federal Corporation, as are all corporations, is beholden to the stock holders.

        • Wolf Richter says:

          Marcus Aurelius,

          “That is not the concern of the Fed. This Federal Corporation, as are all corporations, is beholden to the stock holders.”

          Nope. The Fed is a hybrid organization:

          1. The 12 regional Federal Reserve Banks (such as the New York Fed, the St. Louis Fed, the Dallas Fed, the San Francisco Fed…) are corporations owned by the financial institutions in their districts.

          2. The Federal Reserve Board of Governors is a US government agency, and Powell, Brainard, etc. are employees of the US government. The board members are nominated by the President and confirmed by the Senate.

        • cb says:

          Wolf said: “Nope. The Fed is a hybrid organization:

          1. The 12 regional Federal Reserve Banks (such as the New York Fed, the St. Louis Fed, the Dallas Fed, the San Francisco Fed…) are corporations owned by the financial institutions in their districts.

          2. The Federal Reserve Board of Governors is a US government agency, and Powell, Brainard, etc. are employees of the US government. The board members are nominated by the President and confirmed by the Senate.”

          and, who calls the shots? Who will ultimately be favored? the financial institutions or the people?

        • Wolf Richter says:

          “The people”??? Hahahaha. “Favored”???? Hahahaha. No, “the people” get to pay for it all. That’s how that works.

        • cb says:

          Wolf said: “The people”??? Hahahaha. “Favored”???? Hahahaha. No, “the people” get to pay for it all. That’s how that works.”

          agreed. So why take issue with the assertion of Marcus Aurelius “The country? The citizens? That is not the concern of the Fed. This Federal Corporation, as are all corporations, is beholden to the stock holders.”

          The FED is beholden to the financiers. It is financiers first, the Government a distant second. and as you point out the people last. The whole objective of the FED is to make sure the bankers own and control the country.

        • Wolf Richter says:

          “So why take issue with the assertion of Marcus Aurelius…”

          MA said something about the Fed that was factually wrong and needed to be corrected because it’s important: “That is not the concern of the Fed. This Federal Corporation,…”

          The Fed is a hybrid, part gov agency, part corporations.

        • cb says:

          Wolf said: ” 2. The Federal Reserve Board of Governors is a US government agency, and Powell, Brainard, etc. are employees of the US government. The board members are nominated by the President and confirmed by the Senate.”

          And it’s absolutely disgusting that our US Government uses tax dollars to pay for the larcenous bastards whose primary purpose is the creation of a bankers paradise with an indebted citizenry.

        • cb says:

          Wolf said: ” MA said something about the Fed that was factually wrong and needed to be corrected because it’s important: “That is not the concern of the Fed. This Federal Corporation,…”

          The Fed is a hybrid, part gov agency, part corporations.”

          Thanks for the clarification. Understood. However, Marcus Aurelius was correct that the country or the people is not a concern of the FED. There concern is the Banks, and it is an insult that the FED is shielded by a bastardized hybrid status as part Government agency and their “employees” are paid with government money. The citizens pay for their own debt subjugation, by a bunch of pompous manipulative thieves.

      • SoCalBeachDude says:

        Then the 7,000 or so US member banks would simply WITHDRAW their vast excess reserves from inside the Federal Reserve. The Federal Reserve can and does set IOER (Interest On Excess Reserves) as one of the only 3 interest rates they do set and they better be careful of what they set IOER to or they’ll lose the excess reserves they are keeping for the US banks.

        • Wolf Richter says:

          “… one of the only 3 interest rates they do set”

          The Fed sets 5 rates, currently:

          Federal funds rate target range, 1.50% – 1.75%.
          Interest it pays the banks on reserves, 1.65%.
          Interest it charges on overnight Repos, 1.75%.
          Interest it pays on overnight Reverse Repos (RRPs), 1.55%.
          Primary credit rate it charges banks, 1.75%.

        • Sams says:

          The banks can withdraw excess reserves, but not the reserves the banks are required to hold. The central bank would come out on top anyway.

    • Wolf Richter says:


      Nah. Bank reserves at the Fed have already plunged by $1.1 trillion (-26%) in six months, from $4.25 trillion in Dec 2021 to $3.15 trillion now, and QT will bring them down further.

      Reverse repos will go to near zero over the next few years as QT takes trillions of dollars of liquidity out of the system.

      So the Fed will be paying a higher interest rate on a much lower base.

      The Fed will continue to earn a ton of interest on its shrinking securities holdings. Those holdings might come down by $4 trillion, or maybe by $5 trillion, but there will still be about $4 trillion left, and as it gets rolled over, those new securities will pay the higher coupon interest, thereby increasing the Fed’s interest income.

      The fear-mongering about the Fed is in the wrong place.

      The amount that the Fed remitted to the Treasury was NEVER “hundreds of billions $$$$$.” It maxed out at $118 billion in 2015. Yes, it will go down to roughly to where it used to be before QE, as in 2007 and 2008:

      • Greg says:

        Wolf, my comment is the fed does not want to raise interest rates and point proven by letting inflation run red hot for almost 2 years now. If they were serious about inflation the ffr would be at 10%!
        So, you and the fed are wrong!
        as rates go higher zero will be remitted to the Fed gvt and the Fed will be losing $$$ as it pays interest on bank reserves. The taxpayer will be on the hook.

        • Wisdom Seeker says:

          That is the big question: is the Fed belatedly “getting serious”, as they now say?

          I think they are. They have to restore credibility now (and fast), or else everything gets a lot worse later.

          But denial MUST abound, because, at the end of every bubble someone has to take the losses, and those who will ARE hoping they won’t, or else else wouldn’t be holding the deflating assets.

          Don’t Fight The Fed…

        • Auld Kodjer says:

          This big hole that you’re digging. Scoop shovel or trench shovel?

      • cb says:

        @ Wolf – Brilliant commentary.
        as usual

    • c smith says:

      The Fed can simply forgive whatever amount of debt it wishes. This is profoundly DEflationary, but is the flipside of creating new cash to buy debt in the first place.

  8. Franz Beckenbauer says:

    Message to Wolf:

    It’s not “the government” that pays the interest on its debt, it’s you (“the american taxpayer”) through taxes and inflation.

    So if that’s all hunky dory, good for you.

    • Wolf Richter says:

      Franz Beckenbauer,

      Sure, every idiot knows that government spending, including on interest, is funded by taxes, fees, and borrowing. And I’m paying taxes in the US, no problem. You’re not in the US, you’re in some other country, and so you’re not paying taxes in the US, you’re paying taxes somewhere else, possibly at much higher rates than we do here. So go and enjoy.

      • Eastwind says:

        All US citizens, regardless of where they live, pay US taxes on all their worldwide income. I pay just as much tax, state and federal, as I would if I still lived in the state I moved from to become an expat. The ex- part of expat doesn’t mean ex-taxes.

        OC Franz may not be a US citizen. But you don’t know that.

        • Wolf Richter says:

          I don’t know anything about anybody here except what commenters say about themselves, and his personal pronouns for all the years he has posted here, indicate that “they” “you” etc. are the Americans, him not being included. It’s never “we” or “I.” This stuff gets to be pretty obvious after you’ve been doing this for a long time.

  9. John Apostolatos says:

    “Obviously, a spike like this cannot be sustained without some major, let’s say, re-arrangement, such as a big bout of inflation, I mean, oops…”

    What about currency crises, Wolf? What are your thoughts on the level of debt (relative to JDP) at which the $ could crash?

    I realize Japan is at 250%, but they are still an exporting nation.

    • Wolf Richter says:

      It’s all relative in terms of exchange rates. So far, the dollar is one of the cleanest dirty shirts out there.

    • Wisdom Seeker says:

      Actually Japan is currently a net importer … significant change 2017-2022!

      High energy prices don’t help.

      • Wolf Richter says:

        The plunging yen doesn’t help either.

      • Trademe says:

        Irrelevant as long as the total foreign balance is positive (trade and current account) Japan could care less. Japan still runs a positive current account which more than offsets any trade deficit.

        Once the total foreign balances turn negative Japan is in a heap of trouble.

  10. Ian says:

    Valuable comments Wolf, and in basic terms actually simple when explained like this. I am not sure however, that the discipline you speak of will emerge. They are too used to just blowing everything and once the economy starts to wane with the higher interest rates it would not surprise me for them to reverse course and start QE again.

  11. Miatadon says:

    A trillion here, a trillion there, and pretty soon you’re talking real money.

  12. Michael Engel says:

    1) Inflation 100 history : for 60 years, between 1920 and 1980 the
    trend was up. Inflation was wild, spiking between minus 14% and 22%.
    2) Since the late 80’s inflation is trending down in a channel. Options :
    3) Option #1 : The lower boundaries are in negative territory for over a decade. The current spike might normalize and return to the channel. Eventually it will test the 2009 low, or breach it, in negative territory.
    We don’t know when, how…
    4) Option #2 : We cannot ignore the 60 years uptrend between 1920 and 1980. The current spike is a test of the old trend. The 8.6% is not good enough.
    Inflation might rise to the 12% – 16% area. We don’t know when, how
    and how many tests, before giving up.

  13. Michael Engel says:

    1) Higher inflation rates and higher gov interest rates are two different
    2) Gravity between US & Germany will limit the rise of US interest rates.
    3) Higher inflation reduce US national debt in real terms and increase tax
    collection. Small businesses benefit from higher interest rates
    4) No harm is done (to the gov) until unemployment rise beyond 4.5%- 5%
    along with SPX closing < June 2022 low.
    5) Paying $200B interest/y : JP click $200B credit to the gov for $200B gov bills/ notes.
    6) Don't worry be happy, because : UK, Germany, Japan, India… are our
    best friend. China….

  14. Brendan says:

    “The only discipline in a capitalist system is the cost of capital.” Truer words were never spoken. That is a quote for the ages. F**king brilliant.

    • Dan Romig says:

      Yes, I second that!

      Money (capital) must have value (cost).

      That is rule number one in my book. When that rule is broken, there are consequences; such as the inflation we have now.

      Wolf has done a great job reporting on another consequence, which is the rise and fall of zombie companies. Cost-free capital has fueled up these money burning machines to the n*th degree. If you run a company that does not make a profit, death will eventually be your fate. And that is how it should be, I reckon.

    • c smith says:

      Absolutely. And as soon as central banks decide to create new money to circumvent this discipline, the road to perdition begins.

  15. Brant Lee says:

    Sounds like we’re good for at least another generation. Don’t blame us baby boomers anymore. Order more wine. Only in America. And so on.

    For some reason, debt bugs the hell out of me but that must be a personal mind problem. Now I know why politicians don’t seem the least bit worried about any silly budget. It’s all about who can grab the most money.

  16. Danlxyz says:

    What role does the FED play in this exercise?
    If there are no buyers because of low rates, does the FED step in and buy the bonds?

    • COWG says:


      You may have missed the part that says rates will come up until there are buyers….

      The Fed won’t be buying… that’s what got us into this mess to start with…

    • SoCalBeachDude says:

      Been there. Done that. NOW THE FEDERAL RESERVE WILL INCREASINGLY BE DUMPING BONDS (US TREASURIES) and so are foreigners. How’s that going to work out except to push yields sharply upwards?

      • Wolf Richter says:

        Looking forward to it. I’d love to back up the truck and buy 10-year Treasuries with a yield of 6%. Not sure we’ll get there, but if we do…

        • cb says:

          @ Wolf – 6%? sounds risky.

        • QuestionTime says:

          So you are going to buy something with a yield of 6%, but don’t know what the inflation rate will be at that time?

          What if inflation is running at 8%? 10%

          Are you still going to buy?

        • Wolf Richter says:


          What are the better alternatives at those inflation rates and at these still ridiculous asset prices? Invest in crypto and lose 100%? Invest in stocks and lose 50%? Invest in gold, which nearly doubled over the past few years, and go nowhere for years and not earn any yield?

          With a 10-year Treasury with a coupon of 6%, at least I KNOW I would make 6% a year = 60% over 10 years, plus I get 100% of my money back after 10 years.

          If I put $1,000 into a 10-year 6% Treasury, after 10 years, I will have $1,600 after 10 years.

          If I put $1,000 in crypto, I will have $0 after 10 years.

          If I put $1,000 into stocks, I may have $700 ($500 principal + $200 in dividends) after 10 years – see the stock markets of China, Japan, Spain, Italy, Germany (DAXK), etc. They never went back to their bubble highs.

          If I put $1,000 into RE at today’s prices, I may have $600 after 10 years, and I would have had to pay for the carrying costs, minus tax benefits. If it’s rental property, I will get some revenues to cover the carrying costs, and I get the tax benefits. But I might still be in the hole at today’s prices.

          Those are the risk factors you have to look at if you’re speculating about the future.

          That’s also why generally you don’t want to put all your eggs into one basket. But it could be that all your five baskets are terrible deals because we’re coming out of the Everything Bubble and there may not be any good deals for years to come, and you may be lucky getting 6% a year, for 10 years, when inflation = 8%, even though that’s a terrible deal, but less terrible than the other deals.

    • Wolf Richter says:


      Please read the section in the article, titled “Yield solves all demand problems for debt.” It answers your questions.

  17. SpencerG says:

    It will be fun to watch Republicans try to balance the budget (like needs to happen during inflationary times). They have talked a good game for the past decade or so… but they ran John Boehner out of Washington on a rail after he tried to strike the “Grand Bargain” with Barack Obama and balance the budget. Obama may have blown up that particular negotiation but Boehner’s enforcement of Sequestration was the only thing holding spending down from 2013 to 2015. Then he was gone…

    • David Hall says:

      Unless they increase payroll taxes, the Medicare Part A fund for those 65+ might become insolvent in 2028.

      • Uaredoomed says:

        The reason it will be insolvent is the interest rate repression undertaken from 2008 to 2016 that caused the fund to lose over a trillion in lost interest income.

      • Wolf Richter says:

        That’s a nonsense statement — though it’s used a lot. It won’t be “insolvent.” Medicare is a pay-as-you-go insurance program, like ALL insurance, from health insurance to auto insurance. People pay into it, and then some of them will need to be paid out of it. Medicare does have a fund, but it doesn’t need to have a fund. Benefits can be paid out of the flow of receipts (premiums paid via payroll deductions, Part B premiums, etc.) And if the receipts are not enough to cover benefits – like ALL insurance – then premiums are raised. That’s why healthcare premiums and auto insurance premiums and home owner insurance premiums always go up.

  18. Max Power says:

    I would only caution that in a recession tax receipts tend to fall sharply.

    • Al Loco says:

      Yes, this has to be a consideration if you want to look forward.

    • Nathan says:

      I guess they’ll just plaster over the shortfall with more debt, hoping for a break later with low rates to make up for it.

      I do that when I’m snowboarding and a patch of ice comes. just ride flat and accelerate and hope there will be a chance to slow down later!

  19. CCD says:

    Thanks Wolf. The other dynamic is that the Fed owns almost a third of outstanding treasuries. Interest it receives is rebated back to the govt after expenses incl realized losses on holdings. So interest cost on whatever the Fed holds is close to zero. Because of this, hard not to see implicit or explicit pressure on the Fed to let it’s balance sheet continue to grow

    • Wolf Richter says:

      Yes, the Fed remits most of its interest income back to the Treasury, but before QE that remittance was in the $30 billion range. At the peak in 2015, it was $118 billion. These remittances will drop back to the 2007/8 range over the next few years. No biggie, in a $6 trillion budget and rising:

  20. Eureka Logic says:

    Ok so knowing a tiny bit about this kind of data do you have a chart that tells us the rate of exchange of these debts. Its is ok to see this chart as what is at any moment but it could hiding a balloon of change coming down the pipe. Think of it like this some companies take out debt and pay interest on that debt but some of it comes due. If it comes due today that would be bad, but if you have a few years time to get to the next easing cycle then your fine. Same for sovereign finance.

    • Wolf Richter says:

      US Treasury securities come due on their maturity date. This is tracked and you can look it up. Maturities range from 1-month Treasury bills which mature in 30 days, to 30-year bonds which mature in 30 years. For each security, the maturity date is fixed and known. There are zero surprises in this.

  21. james wordsworth says:

    For years as the Social Security account grew, it reduced the federal deficit. Now it will start to increase the federal deficit as the surplus gets drawn down.

    This also means, at the margin, that there will be one less captive buyer of government debt going forward.

    The real question is how long this inflationary situation continues. If it just for a year or two, then not a huge deal, but if we go 5-10 years (stagflation) then it could be not so nice.

    Japan is instructive of how it is possible to run continuous high deficits (and keep rates low). But the Japanese government is technically bankrupt. Any rate increase would quickly blow a hole in the already horrible budget situation. We really don’t want to go that far down the road.

    • Richard Greene says:

      I believe SS payments have exceeded SS taxes since some where around 2010. Reagan had raised SS taxes before the revenues were needed.

    • Wolf Richter says:

      In terms of just contributions versus benefits:

      But then there is also interest income from the securities in the Trust Fund — see the effect of the Fed’s interest rate repression?

      Which gives you the change in the trust fund balance:

      • Michael Engel says:

        SS Trust : $2.7T, slightly below peak, yet contributions lag payment.
        Where is the money coming from.

      • Richard Greene says:

        This is a pay as you go welfare program for seniors. The wife and I are on the SS dole. The “trust fund” is IOUs from the other side of the government. If SS taxes do not fund SS payments, which has been true since 2010, they go to the other side of the government for a handout. A trust fund of nonmarketable government securities is a “trust fund” of IOUs.

        • Wolf Richter says:

          Richard Greene,

          “The “trust fund” is IOUs from the other side of the government.”

          Hahahaha… just like the Treasury securities that I hold in my account. Treasury securities are the most conservative investment, and that’s what the Trust Fund is invested in, thank god, so it doesn’t plunge like the stock market.

          And thank god they’re non-marketable, or else they would have to be written up and down on a daily basis. But they’re NEVER sold, and market price is irrelevant because the Trust Fund gets paid face value when they mature, and there is no need to write them up or down.

          This is common practice. The Treasurys in my TreasuryDirect account don’t get written up or down either to mark them to market. I get paid interest, and when they mature, I get paid face value (and if they’re bills, I get paid face value plus interest). The Trust Fund operates on the same basis. It’s a good deal. Check it out.

          READ THIS:

  22. misc.etc says:

    Perhaps, I am misreading: But in essence the monster that we are fearing isn’t the one that is coming to kill us all.
    We fear debt interest payments that can’t be made.
    The monster that’s going to kill us is inflation.
    So we’re back to Klaus being right: We won’t own anything because it will all be unaffordable.
    How is any of this good?

    • SocalJohn says:

      Items that are purchased with loans will have downward pressure on price as interest rates rise in response to inflation.
      RE is one example, but it is very slow to react, and it also depends on price levels prior to the onset of inflation. If they are high, as is now the case, they will drop. In the past (70s) they were low prior to onset, and therefore didn’t react the same way. Prices of some things are also limited by wages, but that limiter becomes weak if a wage price spiral occurs. In spite of any such limiters, inflation is a truly horrible monster, as you have observed.

    • Flea says:

      Where will Klaus hide when this plays out,peons 99% wealthy1% not good odds

    • c smith says:

      As long as central banks have printing presses, default is never the risk – inflation is. This is the central fallacy behind the idiocy of Modern Monetary Theory (MMT). Great! Governments (in league with central banks) can’t default – they destroy you instead with hyperinflation.

    • Mylton says:

      The problem with tightening is it will create more debt because budget deficits due to ‘entitlements’ will be even less covered by shrinking tax revenue (deflated $$ and shrinking economy/GDP). They can only tighten until something breaks, and many things are currently in process of breaking at once.

      • Wolf Richter says:

        Tightening causes the overhang of zombie corporate debt and some consumer debt to go into default. It will get restructured, some of it in bankruptcy court, and the economy will emerge with less debt. That’s a good thing. The expense of that debt blow-up will be paid for by investors, and they got paid for years to carry that risk. That’s how it is SUPPOSED to work.

  23. WolfGoat says:

    Good article Wolf… I ran off to look at Tax Receipts over the last few years and it has moved up the Wazoo as well. Capital Gains?

    • Wolf Richter says:

      Yes, plus wage inflation which generates more income taxes, and record corporate profits, which generate more income taxes.

      • SoCalBeachDude says:

        Corporate profits are now severely sagging and many corporations have losses, not profits.

  24. Old school says:

    We are in a new place as debt levels are at record. Maybe we are going to find out if the arm wrestling champ is Mr. Market or the central banks. In the end if it gets bad enough it is Mr. Market voting with his feet on whether the currency is worth holding or not. Sovereign bond market is money with a maturity date on it. There is always an alternative if the central bank screws you over enough.

    I am in the camp the Fed will never get to 4% at least for more than a month or two. Housing and car market will be dead at 4% Fed rate. When you are not building any houses or cars the Fat Lady will start singing.

    • c1ue says:

      There are some credible people who think the Fed is going to do a Volcker, because they can only affect demand – not supply.
      And the Fed can only affect supply by crushing wealth/wealth effect.
      Fed funds rate is still minuscule though, so hitting 4% by November seems unlikely even with more 0.75% rate hikes. But consider 0.5% to 0.75% hikes through the end of 2023…
      Crushing the housing market is only bad (to the Fed) if it is unintentional, and the crushing would be skewed to the first time home buyers. The wealthy people get much higher interest income on their cash hoards to offset.

      • Old School says:

        Crushing the new house construction market and the new car market puts a lot of people out of work is my point. If you put 5 – 10% of workforce out of work everything changes in a hurry.

        Plus I saw a chart yesterday that showed people are borrowing the most money as you go into a recession. It’s just the natural way of things I believe that employment and debt is at the max just when the party is over. Then it’s time to go home and sober up.

        • DawnsEarlyLight says:

          The pendulum swings both ways.

        • Harrold says:

          Cheaper construction supplies and cheaper automobiles will be a boon for some people.

        • Sams says:

          Harrold, consumer price index and other price indexes may come down. Prices on the other hand may not go down less in liqvidation sales. Be not surprised that availability of many types of goods go down too.

        • c1ue says:

          Yes but you are losing sight of the fact that said massive job loss is exactly the goal if the Fed wants to reduce demand.
          Crushing new house construction also reduces demand.

    • Augustus Frost says:

      “I am in the camp the Fed will never get to 4% at least for more than a month or two.”

      If the interest rate cycle bottomed and the bond bull market ended in 2020, interest rates are destined to “blow out” later, past the 1981 peak. The “reason” isn’t evident yet because psychology doesn’t reflect the actually mediocre to terrible fundamentals.

      The US isn’t exempt from reality.

      • Old School says:

        History of money is interesting and you might be correct.

        One thing I am pretty certain is true is if interest rates do go up much there are going to be a lot of haircuts on the debt. If you can’t afford the interest payment then it gets to be a legal or political fight over who is going to eat the losses.

        Money is powerful weapon. Inflation is a regressive tax on the poor. Inflation is policy decision about who is going to take it up the rear end.

        Look no further than Turkey where inflation is around 70%.

    • FED has wanted to raise rates for years and now they have an excuse.

      Do not bet on a pivot.

      The FED is going to punch the economy in the nuts with interest rate rises until the economy loses its inflation woody.

      Things are out of control and, pathetically, that is out only inflation reigning tool.

      Do not blame the FED. We have failed to evolve our economic system and its controls. We are stuck in the mid twentieth century.

      We need to evolve to a more inflation resistant model with better control tools.

      • Augustus Frost says:

        “Do not blame the FED. We have failed to evolve our economic system and its controls. We are stuck in the mid twentieth century.

        We need to evolve to a more inflation resistant model with better control tools.”

        What are you even talking about?

        There are no such tools or model. It’s a failure of central planning, the government “managing” the economy through fiscal and monetary policy. The idea that new and “improved” central planning will lead to a better outcome is nonsensical.

  25. c1ue says:

    Great write up.
    The main issue going forward is de-dollarization: specifically embodied in the Eurodollar market.
    Between the ongoing euro economic collapse plus the secondary effects of the Central Bank of Russia freeze (which now appears to have been Eurodollar deposits), plus sanctions impact on the commodities market makers (Pozsar BW III thesis), will we see structurally falling foreign purchasing of US Treasuries?
    Time will tell.

    • Old school says:

      Seems like Europe may be in political trouble this time. As weaker countries bond prices start to blow out somebody is going to be unhappy with the solution to solve the problem.

      • Miller says:

        That’s been a perennial issue for decades though so nothing about “this time” that’s different, nor is it political trouble–every currency and currency union has a problem with different members on different economic and financial track. It’s a problem here in the US too, with more productive states effectively subsidizing less productive ones, and value of the dollar in practice not the same in different regions of the US (hence the mess we often run into with COL adjustments and salaries in different parts of the country). We can paper over it in the US by calling the currency “a dollar” in different regions but what it actually buys you varies considerably. In practice the EU is getting stuck having to do the same thing, some regions get subsidized (while they “subsidize” the more productive regions with their workers), that’s always how it works. And if anything Europe is much stronger politically this time due to unity in the face of Russia’s Ukraine blunder (and China’s growing trade strength), as one of our leaders once said, the Eurozone is as much a political union (and administrative) than economic one, it stays together because it has to.

        • Augustus Frost says:


          The EU or Eurozone doesn’t have to stay together. The UK left the EU and escaped that roach motel. It’s the elites who think as you describe, not necessarily the citizenry.

          We’ll see how unified the EU and Eurozone are when they can’t get enough gas or other essentials.

          EU are dimwits for allowing US to dictate their foreign policy. The conflict was entirely avoidable, if NATO had told Ukraine it couldn’t join, as it should have.

          Security guarantees aren’t free. The US is overextended geopolitically and lacks the resources to make good on existing commitments.

          Think inflation and shortages are bad now? Just wait and see what happens if the US gets directly involved in a meaningful “hot war”. Politicians and MSM will be glad to volunteer the sacrifice at the public’s expense.

          I don’t know how many security commitments the US has (explicit or implicit) but failing to defend any of them (by choice or military defeat) could lead to a diplomatic and economic disastrous loss of credibility.

        • Miller says:

          I’ve worked and stayed in Europe and no, it is NOT the elites who think this way, it absolutely is the people on the ground who want the EU to stay together. This does not mean they’re happy about everything, they want reforms but very few Europeans want to go so far as dissolve the EU–even the nationalist parties once pushing this have pulled back completely, focusing more on limiting immigration. You make a mistake by trying to hold up the UK as an example–Britain never wanted to be a part of the European Union and never joined the Eurozone, and as an island country with its own unique trade arrangements it’s in a unique situation. (And even then post-Brexit hasn’t been very smooth.) Wildly different case for the contiguous countries on the Continent, for trade, political, security, education, basic social reasons there really is no alternative to the EU. But yes, it does need reforming.

    • SoCalBeachDude says:

      The US Dollar will simply continue rising on the DXY and the Euro is rapidly dropping to parity (1:1) with the US Dollar which is now back to almost 105 on the DXY today.

      • Old School says:

        Might go to parity. Dollar is strong because Euro and Yen are currently basket cases.

        If you get a chance watch Gunlach explain why he is short term dollar bull, but believes it is going below 75 in the next year or two. Basically trade deficit and government deficit too big to keep dollar strong in the long term is his opinion.

        • Augustus Frost says:

          I also believe the USD is approaching a peak though hope I am wrong as it’s my currency of reference.

          If this happens, I expect it to eventually go noticeably lower than 75. As to how that would happen, one possibility is the break-up of the Eurozone where the countries with historically weaker currencies are out.

        • Escierto says:

          Wow. Going from 105 where it is now to below 75? That’s breathtaking and I am not being sarcastic.

        • SIMON LUI says:

          A weak euros and weak yen is good for european and japanese exporters

      • Miller says:

        DXY is a total mess these days due to all the volatility from inflation and the varied, sporadic, spotty attempts from central banks to tackle it while fiscal policymakers fumble around trying to find their own way, all the while the ruble collapses into wastepaper while BoJ likes having some inflation for the yen. So it’s hard to conclude anything at all from currency markets in this environment. DXY absolutely does not indicate strength or confidence in the dollar, otherwise we wouldn’t be having this runaway inflation where the purchase power of the dollar keeps dropping off a cliff in real terms (including for key essentials like housing, gas and food). The inflation is the true reflection of a currency’s value and it’s bad for USD, even worse than many Euro countries (at least for ones where prices for some key staples are under better control). It’s why the Fed is going full Volcker right now, alternative is more erosion in confidence of US dollar as store of value.

        • Don't censor me again says:

          I’ve posted before and every time the post has been deleted:

          The US$ is going up because of all the derivative shorts in place on it.

          It will continue to go up until the shorts have covered and then it will fall.

        • Wolf Richter says:

          Don’t censor me again,

          “I’ve posted before and every time the post has been deleted”

          Hahahaha, BS, your comment to this effect has not been deleted because it’s the first time you made this comment. You’re logging in with a different screen name and a different fake email each time, but with the same IP address in Sydney, Australia. And I just checked, and nope, that line was just more BS from you.

      • Nate says:

        USD is like democracy, it’s the worst form of currency except for all the others.

        And, please, gold is not a perfect solution. There are serious trade-offs with gold standard currencies. Many modern day gold supporters’ ancestors were super anti-gold when you look at political preferences, history, and geography. Go read William Jennings Bryant “Cross of Gold” speech, who represented rural farmers views on inflation.

        If people want to talk about their book, it’s pretty simple. If you owe a lot of fixed debt, inflation is cool. If you are a creditor, or own a lot of assets priced in the currency, inflation sucks.

        • Miller says:

          Even by that standard the USD strength is questionable, again the currencies right now are fluctuating all over the place atm for all kinds of reasons that have nothing to do with strength or confidence in the currency, and it all gets shot to heck further by central banks being all over the map. Some old friends of mine trade on the FX markets and many joke that they envy the stability of the crypto guys at times–there’s no rhyme or reason for half the moves on the major or minor currencies. If anything Swiss franc seems to be the one held in highest regard, and RMB gets more volume out of sheer necessity from trade, but it’s hard to conclude anything from the forex gyrations. Look to reserve holding levels and inflation to get a real sense of a currency’s value and confidence, while the dollar is by no means the worst, it’s suffered a nasty erosion of its value and reserve holdings with the latest inflation wave, another reason the Fed has to be more aggressive with QT and rate hikes.

        • Craig says:

          I’m not so sure. Norwegian krone has negative debt and Swiss has constitutional limits on the debt. Both are outside EU so avoid a common debt.

          The us had to issue debt in Swiss francs and deutchmarks at one point…

  26. ispanyolca says:

    Dear Wolf

    Do you think the effects of high interest rate on employment and investments ?

    Thank you

    • Wolf Richter says:


      It will reduce the ridiculously high number of unfilled job openings and bring them back into the normal range. The labor market will loosen up some, and hopefully, the “labor shortages” will disappear, so that companies can actually hire the people they want to hire without having to poach them from other companies.

      Investments will be repriced. The higher interest rates will cause companies and investors to make more prudent decisions about capital allocations. A lot of the zombie companies will be restructured in bankruptcy court, and investors will take losses on that. All of these are good things. Higher interest rates are good for the economy long term because they enforce better decision making.

      • Mark_2 says:

        “Higher interest rates are good for the economy long term because they enforce better decision making.”

        A silver lining. Thanks for the clarity!

      • ispanyolca says:

        Thank you for your clarification. We will see it.

      • Nate says:

        I agree. 0-2% interest rates are too low and encourage bad capital allocations. But too high for too long and we risk real estate asset repricing, which can be brutal on the economy because it has a greater participation rate.

        No clue on how you square peg that round hole. You need some inflation to at least mitigate asset repricing, but not too much or the problem gets even worse. I guess I look at interest rates and inflation as poison vs. medicine, it’s all circumstantial and contingent with the central bankers or doctors more like gamblers than gods.

  27. DanS86 says:

    We can only hope. Encourage saving and investment…wow!!!

    • Old School says:

      Seems like modern macro economist miss the history lesson of prosperity that people are not a factor in an equation but need proper incentives to be productive.

      You can’t play games with taxes and inflation and take half of people’s hard earned labor and expect them to be productive. They make a rational decision it’s better to get in the wagon instead of pulling it.

    • DawnsEarlyLight says:

      Encourage saving? Where did that get you for the last ten years?

  28. Winston says:

    Finally! An analysis of what I’ve been searching for forever and have never found. Thank you!!!

  29. GI Joe says:

    Interesting and Thought Provoking.
    Thank you for the work and for sharing

  30. Anthony says:

    Do governments, at the moment, have the ability to curb spending,……………… probably not……but i do believe in six impossible things before breakfast…..

    • rick m says:

      Anthony – At the moment, probably not. Several times I’ve lived in vibrant, productive areas that generated lots of taxes and government usually spent much, maybe saved some, then spent that on misjudgements of real world infrastructure costs or “emergencies”. Every public piggy bank gets broken open eventually. Governments could curb spending, but it’s an attack on an entrenched, organized something -ocracy. Their future is assured, your’s is secondary. Not feasible to eradicate some invasive species and bureaucrats are that. They’re like unionized palmetto bugs. If the debt load across governments and the governed wasn’t so debilitating and sapping economic strength, the perceived future might be brighter and people might be more accepting of life without every latest luxury, because they wouldn’t have to watch the government blowing their savings and their kids futures, and could kick them out if they didn’t mind the store. But people who owe so much they can’t get ahead look at the government in a worse mess and lose hope of fixing anything. As it is, honest bookkeeping would have closed our (US) store years ago, and we’re in good company. As a financial practicality, we can’t handle the truth. As a social sign of the times, we wouldn’t believe it if we heard it.
      Listened to the BBC reading of “The Hitchhikers Guide to the Galaxy” at night on the Port Bolivar beach almost forty years ago, public radio was scarce and apolitical then in Texas.

  31. Rav4 says:

    More interesting would be state, county and city debt. None of those entities can create money to pay their debts. Illinois and Chicago might be worst-case examples with businesses and productive people leaving because of high taxes, crime and regulations.

    • Wolf Richter says:

      Cities can and do file for bankruptcy to shed debts. States still cannot file for bankruptcy, but Puerto Rico was a (not very effective) work-around. I think it would be good for states to be able to file for bankruptcy and shed their debts that way, and muni-bond investors will take those risks if they get paid a higher yield. That’s how it should be.

    • Miller says:

      Trust me we have the same problems going on down in Texas, Florida, North Carolina and Arizona where most of my family lives. Despite its reputation Texas is not a low-tax state, the property tax in Texas is some of the most burdensome in the nation (it’s worse than California) and Texas also has some of the dumbest regulations too. That’s a big reason behind the power company disaster in 2021 with many Texans literally freezing to death in their homes as power and water pumps were often down for days or weeks, there were some smart regulations put in place, but others that were clearly designed to favor politically donating insiders that blocked a flexible response. Even conservatives down here are made at Abbott about that. As for businesses, some big names like Tesla capture headlines but some are leaving Texas too, for their own reasons. And crime? That’s most states in the US right now. Yeah, Illinois has some serious problems in these areas but they’re hardly alone.

      • Miller says:

        should read, “mad at Abbott about that”

      • w.c.l. says:

        It costs money to run governments. If they don’t get it here (income taxes), they’re going to get it over there (sales and property taxes , fees, or something else). Nobody rides for free.

        • Miller says:

          Yes, indeed. That’s a factor forgotten by far too many of the companies and individuals who talk about moving to state X or Y because “it’s such a nice looking state with no income tax”. For at least basic infrastructure, health needs and education, those funds have to come from somewhere, and if income tax isn’t paying, something else is gonna be taxed to the moon, and if you don’t know what it is–it probably means you’re the one being set up to be the tax cash cow. Florida has the same thing going (also high sales and property taxes and a nasty corporate income tax), and Delaware.. don’t even get me started on.

  32. Augustus Frost says:

    The level of public debt and the cost of financing doesn’t become a problem due to some arbitrary threshold. It’s psychological based upon the market’s pricing of the currency and debt. That’s what triggers a debt or currency crisis.

    I think it was the BIS which performed a study concluding that 90% debt/GDP was the problem point but it’s not absolute. Japan passed that point years ago while more recently, Spain ran into trouble somewhere around 54% or 62%. (I read conflicting numbers.)

    • COWG says:


      But I believe it was Rogoff/Reinhart in a paper a few years back that suggested the 90%…

      Found it… New York Times op-ed… April, 2013…

      A good follow up was in The New Yorker shortly afterwards…

      • Old school says:

        Carmen Reinhart was interviewed on Bloomberg yesterday. Her specialty is sovereign debt crisis vs Yellen who specialty was as a labor economist.

        I don’t know if it’s me or not but Yellen seems dumb as a box of rocks compared to Reinhart, but maybe Yellen is just a prostitute for powers that be. Didn’t she get $5 million from Wall Street for giving some speeches? What ever happened to avoiding even the appearance of conflict of interest?

        • VintageVNvet says:


        • cas127 says:

          Re Yellen

          Or anybody else who bounces between Fed/Treasury or vice versa.

          Given the downward spiral of the American economy (real or financial) it is like watching the human embodiment of debt monetarization and national decline.

          A senility shuffling bits of paper from one pocket to another, endlessly, as the room about them burns.

          But Zimbabwe Ben Bernanke was as bad, and more arrogant.

          “We have a technology…”, indeed.

  33. Nathan says:

    The government debt is mostly in 1 and 2 year treasuries. it won’t be long at all before they are paying 3% on 30T. Sure, they won’t feel any pain in Q3 ’22, but in 2024 they will. That doesn’t seem very far away, even if Wolf will have written 200 articles between now and then.

    I’m hardly reassured that they’re financially healthy from you saying “relax, they won’t see the problem at least until their debt matures”

    • Old school says:

      I have ridden the roller coaster up and down over the last few years with the two year. Been quiet a ride, but it was better than being further out on the curve. I wouldn’t have slept very well with a 10 year Treasury.

    • Wolf Richter says:


      “The government debt is mostly in 1 and 2 year treasuries.”

      Nope. The average maturity of the outstanding balance of (publicly traded) Treasury securities is 62 months (5 years, 2 months).

      Treasury securities held in gov pension funds, the SS trust fund, etc., have longer maturities on average.

      • DebtMaster says:

        “Higher interest rates will enforce a sort of discipline on the drunken party……..”

        It may go on for a while in the US as the debt is made up of a bunch of different securities, but not as long as you think.

        First, the government needs to raise money to cover the constant deficits which will face higher rates immediately. That is around a trillion or so a year.

        Second it will have to roll over the amount of debt maturing as well.

        Third, it will have to raise more funds to cover the interest on the new debt as the interest rates may be higher. This is especially true for the short term maturities that are being rolled over.

        There are about $4 trillion in one year T Bills outstanding which will be rolled over and subject to the higher interest rates over the next six months or so.

        2022 will also be the year with the most T-note roll overs as well. That is another $4 trillion or so.

        That means about $9 trillion is going to be refinanced at higher rates in less than one year.

        And looking at the recent changes in issuance of different maturities of Fed debt shows that most has been moved from the short end of T-Bills to short term notes with duration of 1 to 3 years. So that will also need to be refinanced in a short period of time.

        The current average interest rate on the outstanding tradable T-Bills is 0.07%. The current average on the outstanding tradable T-notes balance is 1.47%.

        And for those that are keeping track it means that for every 1/4% increase in the Fed discount rate if passed on its entirety to the debt markets means $10 billion or increase in cost of current T-bill balances (if not changed) and $30 billion for T-notes( if not changed).

        As the amount of debt will increase over time that also means the above numbers will increase as time passes.

        So, no the average maturity is meaningless.

    • JeffD says:

      Nathan, all the more reason to get inflation under control *now*, correct? And the higher and faster they jack up rates *now*, the sooner they get inflation under control. Then they can go back to issuing debt near the old rate levels. The worst thing the government could do, if they want to minimize their long term high rate debt obligation, is to dilly dally, as they have been doing for over twelve months at this point. A 1.5% to 1.75% effective funds rate is a joke in the face of 8%+ inflation.

  34. Candyman says:

    The concluding paragraph infers higher interest rates will prevent destruction from inflation. That is true, only, if interest rates go high enough to curb inflation. Currently, it is too little, too late. Destruction is coming if the FED doesn’t react more decisively.

  35. carlos leiro says:

    Hello everyone.
    How does the trade balance play in this scheme?

  36. The Real Tony says:

    With the real inflation rate so much higher than interest rates the debt is now being inflated away.

    • Old School says:

      Government really sprayed money around when pandemic hit. Some were net winners and some were and are going to be net losers. I was a net loser overall I guess.

      My son-in-law has a good attitude about government handouts and said he figured out early on if he was going to make something of himself he would miss out on the government candy and it doesn’t bother him.

    • Augustus Frost says:

      The debt is constantly being inflated away.

      Anyone looking at things linearly will possibly or likely conclude it’s sustainable. Government spends more and more but GDP always increases while central bank debases currency enough to perpetually cheat savers.

      Eventually savers go somewhere else, physically if necessary. Or, a catastrophic non-linear “black swan” occurs “out of the blue”, like the Russia-Ukraine War which I predict will ultimately trigger much bigger geopolitical “blowback” wreaking havoc on the US budget, US economy, and US geopolitical standing.

      Most people routinely ignore basic math when the (implied) outcome is contrary to their personal preference.

      But it’s more than that. There are fundamental drivers (physical events and psychological outcomes) which are outside the control of any individual or the (US) government which the vast majority implicitly rely on to maintain the status quo. The human driven events (psychological) invariably come “out of the woodwork” during someone’s bear market, possibly somewhere else.

      Once this mania and the fake “growth” that comes with it is over, that’s what’s going to happen when the bear market matures sufficiently, making obvious the mediocre to awful fundamentals hidden in plain sight.

    • Miller says:

      It’s impossible to truly inflate public debt away though, at least not anymore. The higher costs just mean government allocations go up too with new budgets and appropriations. Many payouts are pegged to inflation, and when unpaid debts roll over they’re hit by the higher interest rates too. If it was so easy as just inflating away debts then the Ottomans, British, Romans and other past imperial powers would have done it without trouble. Instead, their inflationary crises helped to bring down their empires and even lead to the collapse of their states.

  37. Drake says:

    Who cares if they can’t pay the interest on the massive US debt. When I can’t pay my bills nobody gives a crap. They have billions for every other pet project, social program, black hole government spending. Pay the higher interest and shut up.

    • Flea says:

      While we give Ukraine billions we don’t have ,even though they really do deserve it

  38. joe2 says:

    Thanks Wolf. I appreciate this take on an earlier question of mine. I really appreciate your patience to collect the data. This is, I think, the strength that elevates your site above the opinionists – even me.

    “So interest expense has been rising, but tax revenues have been rising even more quickly along with GDP”

    What about a recession and dropping tax revenues and increasing unemployment? Yes this is a hypothetical.

    And I see your optimism in thinking the bulwark is rising inflation that MUST be addressed. Ha Ha! Biden has already said he is ready to spend and give away as much as required to curb inflation.

    Recalibrate your hope meter.

  39. joe2 says:

    And it’s gone.

  40. Jdog says:

    Interest to GDP is a worthless measurement. It does not reflect the real concern which is interest to income. It is the people who pay the taxes that pay the interest, and if the interest payments are rising significantly faster than income, then that is going to translate to higher taxes for workers at some point down the road.

    • Wisdom Seeker says:

      Interest / GDP is meaningful – just multiply interest/GDP by 5 or 6 and you know Interest/TaxRevenue.

      Federal revenues have been roughly 1/6 of GDP since 1952 (range: 15-20%).

      P.S. There are at least 3 scenarios:

      1) Higher deficits are used to pay the higher interest.

      2) Higher taxes are extracted to pay the higher interest.

      3) Government spending must be cut somewhere to free up existing taxes to pay the higher interest.

      Maybe) Population or productivity growth produce enough extra wealth that the government can take some without making individuals poorer…

      • Jdog says:

        It is meaningless because of the fact that corporations are eating up a continually larger percentage of GDP vs. workers. Yet it will be the workers that will end up paying the interest on the debt to a disproportionate degree, because the corporations bribe the government for lower tax rates and their accounting is fantasy to begin with. Bottom line is it does not matter how big the pie is, when you get a very small slice, but have to pay most for having the pie baked.

  41. Roger Dodger says:

    Here is another way of looking at interest payments on federal debt.

    Four quarters at $130 Billion each is $520 billion dollars. Half a trillion dollars.

    “VA is requesting a total of $301.4 billion in fiscal year (FY) 2023 for the U.S. Department of Veterans Affairs (VA), an 13.3 percent increase above fiscal 2022 enacted levels.”

  42. billy says:

    The federal government is running a deficit to the tune of 2.8 trillion per year.Once those interest rates take a bite out of the economy and labour market they will be collecting less so, that’s why most financial experts feel that the Fed has painted itself into a corner

  43. SoCalBeachDude says:

    The US government has highly insufficient funds to pay its expenses which is precisely the reason it borrows $1 to $3 trillion a year in additional funds in order to pay its bills and will soon have to borrow even more to pay its bills and is the core reason US Treasury yields (interest rates) are continuing to rise considerably and why the benchmark 10 year US Treasury will soon be well over 4% and then 5% and on its way to 10%.

  44. SoCalBeachDude says:

    Federal taxes fall sharply when the US goes into a recession, particularly a very deep recession or depression such as the one it is facing and the only way to fix the revenue shortfall is to considerably and substantially raise federal taxes which should have been done a long time ago and will most certainly have to be done this year or next.

    • Wisdom Seeker says:

      Bad Framing! It’s not a revenue problem it’s a spending problem.

      The way to fix the “revenue shortfall” is to trim the wasteful excess expenditures.

      With unemployment rates low, a much better solution is to pare back government spending (the original Keynesian approach).

      That would free up workers to produce more goods and services, which the private sector does more efficiently than the government. This would both increase national wealth and generate more tax revenues.

      P.S. Federal revenues have consistently been 17.5% of the economy (range: 15-20%) for the past 70 years. “Getting more revenue” has been tried many times, and has failed.

  45. DR DOOM says:

    The Interest can be paid. It’s easy. Print the worthless butt wipe fiat and pay it. That’s what Gov’t does all the time. There is no claim on the Federal Reserve Notes in your pocket as to it having any value. My collection of Silver Certificates that were replaced by the Federal Reserve Note do make a claim of redemption of face value in silver to the bearer. Print it and forget it.

    • SoCalBeachDude says:

      Silver certificates are cute and collectible as novelties with their blue seals but can no longer be exchanged for silver and that has been the case since the 1970s. Very few were actually ever in existence and I think were only printed in $1 and $5 face amounts. I have a few of them around here somewhere.

      • DR DOOM says:

        If you got a bunch of them “cute” Silver Certificates lying around doing nothing how about sending them to Wolf Street Corp as a donation to help keep you and me properly informed. He has a mailing address and it works. They are still legal tender and can be deposited in a bank at face value. They do have a slightly higher collectible value greater than their face tender value. They may not make it to the bank.

      • Collector says:

        Educate yourself before commenting.

        US Silver Certificates were printed up to a face value of US$1000.

        From 1928 they were issued in denominations up to US$10.

        Those little curios from 1878 -1896 are worth quite a bit of money.

        $5 Silver certificates from those dates are worth from about US$1000 to over US$60,000.

        $10 silver certificates range from the 1800’s clock in at a range of US$300 to US$300,000.

        And if you happen to have one of the US$500 silver certificates from 1880 you are lucky and could get over US$500,000 for one.

    • rick m says:

      Dr Doom – I’ve got $1 horseblankets(large US banknotes pre-1928), Black Eagle and Christopher Columbus, and a $5 Woodchopper and one or more of the reverses says not valid for interest on the public debt and/or customs duties, or something to that effect. Until FDR paper was freely redeemable for gold coins, as was the case with silver until 1965. .625 silver coinage circulated in Europe and elsewhere until the early seventies.
      Sure they can “print”. The creditors must have a compelling reason to accept a given fiat repayment, however. And will credit it’s value marked to market at an advantageous moment for themselves. These are huge numbers and the principals involved are well aware of the niceties of the situation i would think.

    • Brian says:

      Just printing it is not how the government does it. The Fed gets to print it out of thin air, but it’s always given to the government as debt with interest that needs to be paid back.

      We should be doing what you said and take the Fed out of the equation, there is no reason for it to exist, but that’s not how it’s currently set up.

    • Jdog says:

      Yes, brilliant, then in 10 years it will cost you $1000 to fill your shopping cart at the grocery store…..

  46. Zard says:

    Sky is the limit.
    Let change to “Debt Sky”

    • the AD says:

      Debt service or payment as a percentage of the federal budget is around 5% in 2022, and is forecasted to increase to 11.1% over the next 9 years, according to The Balance.

      GAO is urging caution as far as rising interest rates impact on future debt in its May 2022 report.

      • Wolf Richter says:

        the AD,

        The GAO said exactly what I said in the article, that higher interest rates will enforce some budget discipline, and “caution” is directed at Congress to address the budget via spending cuts and tax increases over the next DECADES, which is the discipline that is needed, and only higher interest rates can enforce it.

        But that won’t be an issue for many years. The GOA’s article looks at a 30-year time frame through 2050.

        From the press release you linked: “Without substantive changes to revenue and spending policy, the federal debt is poised to grow faster than the economy, a trend that is unsustainable,” said Gene L. Dodaro, Comptroller General of the United States and head of the GAO.

  47. Marcus Aurelius says:

    Until the interest rate paid is about “3” higher than the real inflation rate it is all a joke and smoke and a con.

    Inflation at 8%?, interest paid should be 11%

    Inflation at 15%, then a bond holder or saver must get 18%.

    I’ll stop buying Gold and Silver, hoarding shoes, socks, oil filters & oil for my 3 cars, canned food I like, tooth paste, printer toner, 13 gal kitchen garbage bags, etc., when my local bank offers me 18% on a one year CD.

    Until then, I can beat the 15% inflation with my latest freezer I have filled with steaks, chicken and shrimp. I expect a 40% return on the Salmon alone this year.

  48. Michael Engel says:

    1) Unemployment rate : 3.6%, a higher low, above 2020 low.
    2) The boomers are retiring. In the next 20 years, 40 – 50 milions, whatever, boomers will retire. Speed matter. If the biggest thrust will be in the next 2-5 years, inflation will rise.
    3) To fill the gap our southern border is kept open. Most them work at
    a wage between $7.25 to $15. Officially there are about 30 millions
    workers earning wages in that range. most of them are shingle mums.
    They compete with the illegal.
    4) The gov benefit from high inflation.Our $30T national debt
    deflate and SS will not be depleted. SS might feed other det, like the DOD.
    5) Problem : with high inflation, – while payroll, disability, vet health, housing… chew up most of the DOD budget – our woke military power deflate.
    6) Our best friends will not trust us anymore.

    • rick m says:

      6) not sure our best friends ever trusted us. They trusted our generosity, certainly, and still do. May they never know disappointment in friendship.

    • ru82 says:

      I read a story where a lot of U.S. citizens in San Diego are buying home in Tijuana, Mexico because cost is 1/2 less and you get 2x more space.

      Many work from home so why not.

      I thought that was interesting.

      • TXRancher says:

        “In Tijuana, Police Grapple With World’s Worst Homicide Rate”

        No thanks.

        • Expat says:

          Well, it’s just the price America has to pay for buying so much drugs and then undermining all attempts at law, order and democracy in Central and South America.

          But don’t think of Mexican violence as dangerous or threatening. Imagine instead it’s a return to the glory days of the American West! I mean, you all idolize that period, right? So Mexico is just Deadwood writ large. And they are doing it more and better than Americans ever did!

      • Jdog says:

        So a house in Tijuana is now near $500,000?? Do you know what it is like trying to cross the border at TJ in the morning? Better be willing to get up at 4AM to make to work on time, because you are going to be in line for hours….

    • Flea says:

      My sons construction business has to pay 25$ a hour ,even then he says can’t make them mad or they go across the street to get a job

  49. Michael Engel says:

    100 years Inflation history, with few spikes to ignore :
    1) The uptrend : Nov 1925 to Mar 1980 highs. // parallel from Oct 1938
    to May 1951 lows. // June 1921 was the lowest reading in that period. Mar 1947, the highest.
    2) The current downtrend channel : Nov 1990 to July 2008 highs. //
    parallel from Dec 1986 to Feb 2015 lows
    3) Nov 1990 high failed to penetrate the uptrend channel.
    4) Option #1 : June 2022 is a spike to ignore.
    5) Option #2 : an incomplete test of the uptrend channel.
    6) We don’t know what, if, how, when…
    7) Tradingview, Economics.

  50. SoCalBeachDude says:

    US stock market momentum is nicely picking up steam today with true price discovery increasingly coming into clear view!

  51. Uber Driver says:

    Thanks for covering this topic.

    You bring up a good point that higher interest rates will only apply to new debt.

    But then what is the average maturity of the existing US debt? That would tell us how long the US will have to fix up its expenditures.

  52. Swamp Creature says:

    “Big Short” Michael Burry, founder of Scion Asset Management, said that what is happening in the retail sector will lead to the Federal Reserve reversing rate increases and its Quantitative Tightening policy before they even get started. Look for JP to get cold feet and halt the interest rate increases, especially in this election year. Kathy Woods was on CNBC today and said we are already in a recession. I agree.

    • SoCalBeachDude says:

      That dude is obviously an utterly moronic idiot and imbecile.

      • Joseph says:

        Comment Guidelines

        6. Comments that are in bad faith, badger other commenters, or attack other commenters ad hominem become fodder for the shredder. If you criticize, please target the comment, not the person.

        7. Comments that insult our authors or other commenters will likely not make it. This includes terms of endearment, such as “libtard” or “fascist.”

        • Wolf Richter says:

          Yes, not good language.

          But SoCalBeachDude was referring to “Michael Burry” in Swamp Creature’s comment, and not to Swamp Creature.

      • Flea says:

        Are you richer or smarter than him

    • Wolf Richter says:

      Swamp Creature,

      Burry doesn’t know squat about inventories apparently. He is looking at inventories measured in dollars, which means all he is seeing is COST INFLATION, not ballooning inventories because inventories reflect the higher costs, and prices of goods have spiked by the double digits in most categories.

      You have to look at the inventory-sales ratio (months’ supply), which eliminates the issue of cost inflation in inventory, to see if retailers are overstocked, and you will see that most retailer segments range from woefully understocked (shortages, such as at auto dealers) to being just a tad below normal levels (grocery stores).

      There was only one category of retailers that got caught with its pants down because they ordered the wrong stuff, and when it finally got in, consumers had moved on to other stuff.

      It’s all explained in my article linked below, with charts. Make sure you read it, and next time you mention Burry’s BS on inventories, you need to crush his BS right there in your comment. The Fed isn’t nearly as stupid about inventories as Burry is. The Fed understands inventories.

      • David Cornett says:

        Moronic idiot, imbecile, doesn’t know squat??? My goodness that is some pretty harsh criticism. From what I understand, Mr Burry has become quite wealthy over the years, he must be pretty knowledgeable about something.

        • Wolf Richter says:

          David Cornett,

          If you had read the whole sentence, rather than just the first four words, you would have seen that it says: “Burry doesn’t know squat about inventories apparently.”

          And he doesn’t, or his lying purposefully to talk his book. You pick.

        • Wisdom Seeker says:

          To qualify as an “investment genius”, Burry only had to be spectacularly right once.

          The rest of the time, he may indeed be a moron like the rest of us peons.

          You can check for yourself whether Burry is right and retail is overstocked – just do some shopping and keep an eye open for all the amazing bargains he says are popping up. I personally am not seeing anything worth getting excited about — but my lunch today cost twice what the same place charged 5 years ago.

    • Niko R. says:

      Burry has good points and not so good ones, like this one. The position many players in the market cultivate is that either Fed crashes the markets or we have a high inflation. IMO, that is a wishful thinking – people want to trade. The untreated inflation becomes the high inflation, and then the hyperinflation, at which point it crashes everything, including the markets, banks, savings, industry, supply chains, human souls, everything. I still have banknotes in trillions, and funky memories where you catch the earliest bus, wherever you go, since the ticket gets more expensive throughout the day, tripling by the EOD. Until currency collapsed. At least we had foreign “hard currency”, like German Marks and Swiss Francs to run to. In conclusion, there must be higher rates and QT to fight inflation or the collapse is imminent.

  53. fred flintstone says:

    Every one of the indexes, Philly, Kansas, Dallas etc is showing some serious weakness.
    If I were a working man I’d be screaming like Sen Warren…….but…….since I’ve got serious cash waiting for idiot boy to raise………. and profiting from shorting the market…….it must be transitory.

    • SoCalBeachDude says:

      Everything is always merely transitory – including life itself.

    • WolfGoat says:

      Shorting the 10Yr Bond Market has worked well… every time the fear factor kicks in and rates tumble, I’m in!
      Went down to about 3.04 last week, went up to about 3.24 this morning and I bailed. Then when the NASDAQ tanked this afternoon, rates pulled back to 3.19… been a fun game! Because you know, the only direction in the long run from here… is up!

  54. SoCalBeachDude says:

    With folks are clueless and stupid on Wall Street, who can even slightly wonder about MW headlines like the following:

    MW: Financial markets seen unprepared for risk that inflation resists Fed rate hikes in second half of 2022

  55. SoCalBeachDude says:


    DM: Fed Chair Jerome Powell warns that government debt is on an ‘unsustainable path’ and admits that he ‘underestimated’ the threat of inflation for much of last year

    Powell’s remarks came in testimony before the House Financial Services Committee on Thursday, as the powerful Fed chair wrapped up a second day of appearances on Capitol Hill.

    • sunny129 says:


      The FED is partly responsible for that situation, by readily agreeing to substitute monetary policies aka ‘easy-peasy’ (money printed out of thin air) instead, of demanding the Congress and the WH, to do, the needed fiscally policies to restrain deficit spending. Fed is complicit in this tragedy starting 2000 with Greenspan + subsequent chair persons, up to day

  56. cb says:

    Wolf said: “because the only discipline in a capitalist system is the cost of capital.”

    What a great line.

    Sort of punctuates the advantage given those insiders, and those close to them, who get to create capital from nothing.

    a bunch of self serving larcenous bastards, they are ……………..

    • Expat says:

      So banks will just take more risk to get higher returns on capital. They know they will be bailed out. The mechanism is the same as sub-prime and the ratings game. Everyone went on yield hunts but instead of being driven by rates, they were driven by returns. In order to facilitate that, the system decreed that the worst risks were all AAA! Hooray, free money!

      Ask yourself this. What return would you require to lend to the obviously corrupt and irresponsible US government given the real levels of inflation we have now and have had for decades? Or what rate would you apply to a loan to Goldman Sachs, Citibank or HSBC? What about a personal loan to the Pillow Guy?

      If you are willing to lend them money at under 6%, God bless you…you’re clinically insane.

  57. Joseph says:

    wow , i really hope this happens. You’ve left me with more questions now . Wolf , what would be the costs on the economy for those persistent higher rates,
    “Higher interest rates enforce discipline” , i mean discipline is a tough word nowadays , specially after a decade of QEs and Speculative mania. Also what about the demand destruction scenario ?

  58. Gooberville Smack says:

    So when is the crash?

  59. J-Pow!!! says:

    Wait…we gotta pay interest on all that cash I printed?

  60. Wild Bill says:

    Really depends if the USA Casino can continue to lay-off its chips to other [intimidated] casinos, them doing the same, but on far smaller scales….as has been the case since the end of WW2.

    That’s what allows the deal to go on forever, huh? The big casino (USA) floods The Strip with its chips, and forces all the other casinos to honor them. Used to work with gold; hasn’t since 1971, afterwards worked with military might. Does that still work? We’ll shortly find out.

  61. GvsCfa says:

    The economic version of “The Road Not Taken”: Hmmm. We have two choices here. Which should the US government do? Higher interest rates to enforce discipline (per your article) …or… to hell with discipline and just print more money. Not much of a choice here.

    Wolf, I’ve been with you for most of your articles but now you’ve gone off the deep end. Enforce discipline! That’s a joke, right???

    • Wolf Richter says:

      10% 10-year yield would enforce brutal discipline. Too brutal. 6% would be hard discipline, something like “tough love.”

      • sunny129 says:


        I sure hope and pray that you are right!

        But I have a difficulty of picturing Mr. Powell going beyond 4% into 5%, let alone 6%.
        Wait N see!

        B/w I have seen/read Mr. Groman advocating Bit Coin and Gold for the past 2-3 yrs! Guess NOT any more!

        • Wolf Richter says:

          A 6% 10-year yield might mean 3.5% or 4% FF rate, if the Fed continues with QT, and if the market believes that the Fed will continue with QT — the market doesn’t yet believe it though.

          Mortgage rates in the 7% to 8% range.

          That might be enough to start bringing down inflation.

          I do believe a 10% 10-year yield would be too much of a shock. I don’t think I want to go there :-]

      • c smith says:

        Given the 6X increase in overall leverage in the economy since the early 1980s, a 6% 10-year would provide plenty of “discipline”. It might crash everything.

      • Jeff says:

        Real negative rates means that the ‘growth’ is fake and only nominally supported by more debt. More of the same, but not as fast.

  62. Dominic says:

    According to the detailed operational mechanics and accounting analysis of government finance offered by MMT proponents, spending comes before taxes and borrowing (the gov spending itself create the funds to buy government bonds) and interest payment is simply part of government spending.
    So the government can pay any interest rate on bonds denominated in its own currency.

    • Wisdom Seeker says:

      LOL “can pay” isn’t the same as “should pay”, and “can spend” isn’t the same as “should spend”.

      MMTers somehow always forget the part about how the spending has to be reined in to avoid crippling inflation.

      One might echo Wolf’s Dictum about the cost of capital by adding that “High inflation is the only source of discipline for government fiat spending.”

      Watch Japan and Europe, they are going to get disciplined first…

  63. Fred says:

    Why don’t we just print, print, borrow, borrow, bankrupt the UN, IMF, world Bank, WHO and many other world organizations with those associated with them like NGO’s, CCP etc. and make the world better off.

  64. sunny129 says:

    In the last week or so, Sen Rand Paul introduced a bill for balanced budget, hold the spending to 2018 level at the senate. That bill got defeated by 67 to 23!
    The so called ‘fiscally’ conservative 17 members of the GOP voted against it along with all the democrats! 4 GOP members just skipped town!

    Congress is unwilling to control deficit spending! That’s their ‘bread & butter’ to offer ‘freebies’ to their vested interests! the crisis has to hit them on face!

    • Beardawg says:

      Sunny 129

      Though I do not know what was specifically in the bill proposed by senator Paul, that is an alarming margin of defeat.

      I guess Rand Paul and those who voted for the bill have something they can fall back on at time of re-election, etc., but what good is it if the prospect of a balanced budget is, and will always be nothing but a pipe dream?

      • sunny129 says:


        Specifics are online for any one to see, including the names of GOP members!
        MSM virtually ignored this news!

    • Expat says:

      It used to be that so-called liberals were the bane of balanced budgets. Now it’s Republicans. Of course, Republicans still lie and weasel about it by claiming things like “trickle down” or “stimulating local economies through military spending.”

      You want to balance the budget? Cut spending on War and the intelligence/ national police apparatus. You want to expand the economy? Take half of what you cut and pour it into education, especially for minorities.

      Of course, you all keep voting for the same corrupt assholes and then whine and pretend it is the “other guys” who are screwing the nation.

      America, you deserve it!

      • Jdog says:

        The government will never cut spending without some drastic pressure from the public. The purpose of government is to take bribes and grow itself. Until the people get screwed so bad, they finally wake up and realize government is the enemy and not the solution, nothing will change. By that time, it will be too late.

        • sunny129 says:


          It is amazing that most Americans vote for lawmakers who favor ‘special’ vested interests than who try to legislate bills in public interest.

          Economic interests het subverted, every time’ around elections time’ by bringing ‘below the belt’ issues and ideology zombies!

          Americans cannot blame any one but themselves! Polarized and poorly informed electorate doesn’t spell for future of democracy!

      • cb says:

        Expat said: You want to expand the economy? Take half of what you cut and pour it into education, especially for minorities.”
        Is there is a lack of money spent on education for minorities?

  65. JeffD says:

    I really don’t get it. They printed all this money within the last two years, and most of it is not directly available to the public, so why don’t they just take a big chunk of it back? It makes no sense to me that that option is mostly not being exercised, other than the excruciatingly sloy QT, even at a trillion a year. It seems better to take the money back as soon as possible rather than people feeling like its “their property”.

    • WolfGoat says:

      Raise taxes perhaps? That’ll slow down the economy!

    • Jdog says:

      It is their property… they stole it, and spent it, and will receive lavish paybacks for the way they spent it, and you will have to repay it. That is how government works.

  66. Expat says:

    It’s not just the government. And of course there is always that old chestnut, “the debt is in US dollars so the government can just print whatever it takes to pay it off.” That works in a vacuum, of course.

    What about corporate America? Or household America (those sheeple we lovingly refer to as the American Consumer)? No one in America can afford higher rates. Given the levels of debt, high inflation is certainly in the richest 1%’s interest; they can inflate away their debt while watching their assets rise. The rest of the population can pick one child a night who has to go hungry; fuck ’em for being poor and horny, right?

    The US (and the world) has pumped up the economy over the past 20 years by printing money. We have burned forty to fifty years of resources which is another form of borrowing that can’t really be paid back without immense and unacceptable consequences. So now rights are going back up to fight the worst inflation in fifty years and most people are whining about both.

    Can we have it both ways? Can we have low rates, high growth and no inflation? Sure, why not? just change the CPI calculations again. Hey, presto, no inflation. If you see a quart of milk at $10, that is just your own delusion.

  67. cb says:

    @ Wolf –

    I bonds are now paying 9.62%. That is an attention getter.

    I know you have lauded the attributes of i bonds, or was it TIPs? If you have a convenient link to your thoughts on this, would you please share it?


    • Wolf Richter says:

      TIPS are very complicated and can produce tax issues. I bonds are simple and have tax advantages. But people do need to understand that the same I bonds that now pay 9%+ can pay close 0% interest when CPI gets close to 0%. This happened before. These are variable rate bonds.

  68. michel says:

    @Wolf Richter

    “enforce a sort of discipline”

    If you try to pay back too much debt, you get deflation and the debt increases in real terms while it could even be decreasing in nominal terms (debt deflation). It seams every one ignores this opposite counter reaction. This is why it’s perfectly possible that it’s in fact already too late. It’s too hard to determine what’s the threshold.

    The opposite of this is of course hyperinflation.

    The real problem is not the level of inflation, it’s the debt burden. This is what forces you to inflationary extremes. Explained differently, if you passed the threshold, enforcing an inflation of 2% means the debt increases in real terms very fast.

    A spreadsheet simply can’t transcend the laws of nature. You can’t generate real value with accounting tricks. All we really have, is a spreadsheet so complex, that you can’t see that it’s mathematically inconsistent.

    • Wolf Richter says:

      Debt blows up at the expense of investors through defaults. High interest rates can cause defaults by zombie borrowers, and they will shed that debt at the expense of investors. That’s how it is supposed to be. Investors got paid to take that risk.

      Debt isn’t a permanent thing. Debt is risky, and investors need to be paid adequately to take that risk. High interest rates will cause debt to decline, low interest rates encourage debts to balloon. You do not ever have a debt overhang in a high-interest rate environment. That only happens during low interest rates periods. Low interest rates are insidious over the longer term because they encourage too much debt.

      • cb says:

        @ Wolf: “Low interest rates are insidious over the longer term because they encourage too much debt.”
        low interest rates are also insidious because they reward the reckless and punish the prudent. This can change the whole character of a culture.

        and most insidious is that low interest rates change the culture and ownership structure by creating a debt based society subservient and beholding to the money fabricators and money lenders. a culture of debt and wage slaves and masters

      • michel says:

        read on “debt deflation”. It’s not a thing invented by a comentard. This assumes that the level of debt has exceeded some unknown magical threshold. It’s possible that it was silently passed years ago.

        If people default you destroy the banking system. Can’t do that. Guess who will bail out the banks then, yes the over indebted state that just let their clients default because it can’t bail them out any more. Do you see something pathological here?

        If the state defaults the banking system needs a bail out from the state that just defaulted on them… Sounds like a hamster wheel.

        The state borrowed from the banks while the banks are guaranteed by the state. What can possibly go wrong.

        Debt generates deflation(in our stage) and that in turn increases debt. If you reach this stage, you are simply finished. You can as well just hyperinflate.

        It’s not just a few investors defaulting and then the system is back to normal. Too many defaults cascading in to even more defaults destroying even the healthy enterprises. It’s a chain reaction.

        Explained differently: Debt is money, if you destroy too much debt you destroy money and you get deflation and your real debt actually increases. The more you pay it back the more it grows in real terms…. because deflation turn things upside down.

        • Wolf Richter says:

          “If people default you destroy the banking system. Can’t do that.”

          Nah. Much of the debt is held by investors, not banks (bonds, leveraged loans, MBS, CLOs, CDOs, CMBS, credit-card backed ABS, auto-loan ABS, etc.). And a big portion of the MBS are guaranteed by the taxpayers. If the borrower defaults, investors will lose money, as they should, and with MBS the taxpayer will lose money, as they shouldn’t.

          Banks only hold a portion of the loans, all of them collateralized, so they’ll get at least part of their money back, and they have lots of capital built up to absorb losses when companies and consumers do default.

          And yes, what this economy needs the most is a huge amount of debt destruction. There is way too much debt. And investors had it so good for so long, it’s time they pay their dues. The economy will benefit from getting rid of the debt overhang, at the expense of investors.

  69. Steven Rowlandson says:

    Governmment will print what they cannot borrow or tax.
    Result will be big inflation or worse.

  70. Isaac S. says:

    Good and important article showing how the US gov can afford to pay higher debt interest rates, but have a couple counterpoints.

    1. How long before stagflation causes debt servicing concerns/problems as the crash in asset values and job losses plunges the windfall tax revenues? Maybe 2 years?

    2. How long before the high COLA on all government spending causes debt servicing concerns/problems re Item 1 above, and the Fed is forced to induce an even deeper recession (with stronger QT) to reverse the stimy induced spending/wage gains to get some negative COLAs? Maybe 1-2 years?

    I’m thinking the Fed/Treas cannot handle this high inflation induced high interest rates for more than 1-2 years without a high rate of failed auctions, limiting its ability to do Keynesian debt spending after the stagflation is over to avoid a deep recession.

  71. hickory says:

    “This $666 billion is the 12-month total, and I agree with that, BUT THAT’S ONLY ABOUT 2.8% OF GDP, HALF of where it was in the 1980s.”

    O.K Wolf, but it is not the point, it is simplification, there are lot of other reasons why Fed will have to restart QE, think exchange rate, trade balance, bankrupt Eurozone, eurodollarmarkt and other unexpected consequences. All of this will impact US economy. It is wishful thinking the Fed could control the inevitable collaps of the credit bubble.

  72. michel says:

    again, this assumes that the threshold was passed. I’m not saying this will happen for sure. The fact that we have the worse inflation of the last 40 years sure is suspect though. In the real collapse, this is how it would start.

    You are not taking deflation into account. What you are saying risks deflation. That causes an inversion of the result.

    Defaults are not free. People feel poorer, spend less and contribute to deflation and recession. GDP goes down, debt becomes more unsustainable. Banks get squeezed, lend less and aggravate the situation. And state revenues fall.

    Everything shrinks. The defaults don’t solve anything, you are running in a hamster wheel and going nowhere. Deflation simply turn things upside down and you aren’t solving anything. The madness simply inverts to the other direction.

    If you try to monetize your self out of deflation. You’ll put too much money in, that will get treasurised. All that money will suddenly give large inflation if it goes positive again. This is what happend just now.

    If there’s too much total debt in the system. It doesn’t matter what you do, you always end up with disaster. You can do all the recombinations you want with defaults, monetization, payback etc…. The state defaults, or the people or the banks, payback or monetization etc, nothing works.

    It’s like an explosion. The system is releasing it’s excess energy in a catastrophic way. You said it your self, the party has lasted for too long. Now all this stored energy from years and years of mismanagement will explode uncontrollably very quickly. The bubble doesn’t deflate, it explodes and rips apart healthy structures too.

    There’s too much energy in the system, when you try to squeeze it down, it pushed the inflation negative and it’s still there…. and it still growing and growing. And then it explodes in your hand and lose your fingers. Your only choice you have is, which of your hands will lose it’s fingers. Hyperinflation? Monster deflation? Destroy your banking system?

    The status of the dollar will also invert. It is supposed to be a safe asset, if people lose trust in it, it risks crashing like Luna. They are complications with foreigners. If they need money all at once, they will sell dollar assets all at once too. So… this could be beyond the USA ability to do anything to stop this.

    In the 90s they were lines forming at Japanese banks. The Japanese media, decided to self sensor, because it wasn’t in the national interest to spread the panic. For the dollar, foreigners don’t give a damn, if they are lines forming in Brazil of people wanting to sell their dollars… the Brazilian government will just let them and the panic will spread uncontrollably on the entire planet.

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