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Fed Raises Rates to Fix Inflation – It won’t and this is what it will cost you

Fed Raises Rates to Fix Inflation – It won’t and this is what it will cost you

The Fed just raised its rates, this time by 0.75%, a massive and historical figure by Fed standards, to 1.75%. They have signaled that it will increase to 3.5% by the end of the year, and 4% next year.

Traditionally this is what the Fed does to reel in inflation. The idea is to slow down consumption so that the cost of goods a cheaper. People cannot borrow as easily to build more business, buy a new house, or put so much on their credit cards if the rates are higher. In 1980, the rate reached a high near 21%.  But in 1980, our national debt was only about $908 Billion, about 1/3 of our GDP.

This seems like a lot of money until you realize that our current national debt is over $28 Trillion on a GPD of $23 Trillion. That means that our debt service payments will go up proportionally.

So let’s get real for a second.  With an 0.75% increase in debt service, that comes to about $200 Billion per year in extra payments that we get nothing for. That is an additional $600 in debt for every man, woman and child in the U.S.  – every year it is maintained.

And you who are breadwinners know this falls disproportionately on you. Welfare recipients will get cost of living increases, retirees will get cost of living increases, all on the backs of the most productive people.

If it gets up to 4%, that means an additional $2500 per man, woman and child in debt. And that happens every year. And yes, it affects the breadwinners the most.

And what happens when the U.S. GDP growth is (for example) 3% while the debt service on a national debt that has exceeded our GPD  is at 4%?

We get to the death spiral. 

The Fed has to print more money to cover the debt. They have no choice, there is no other money to be had.  Which means, you guessed it:

Inflation.

I would think the Fed would be aware of this. But we have already pointed out how stupid they have been in not realizing that inflation was going to be a problem.

But I will tell you now. The Fed’s actions will not solve inflation, it will make it worse.

Sorry for the bad news folks.

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8 Comments

  1. Darlene Winters

    I worked 50 + years at a full time job paying in to social security and I’m still working a part time job paying in to social security, I don’t like you saying everything is on the backs of the working people. I think retirees deserve a whole heck of a lot more than what they are getting. Doesn’t 50 years mean anything to you? Would you be able to live on $1500.00 a month???? At 77 years old I would like to live comfortably but can’t.

    Reply
  2. Jack

    The fools just don’t understand economics

    Reply
  3. Andy

    As usual, you lie about the cost of the interest rate rise. 80% of US debt is 2 years or longer, not subject to the rate increases by the FED. Why do you keep lying about this?

    Reply
    • Frank stetson

      We’ve said this before. The current debt is un affected by the rate change. Like your mortgage doesn’t change.

      New debt would be affected.

      All payments are affected by inflation.

      It’s the excess reserves you should watch; that effect will be a first and is much scarier than anything you ate looking at. .

      Reply
      • Joe Gilbertson

        The markets adjust very quickly, don’t think for a second that old debt is not affected.

        Reply
  4. frank stetson

    “The markets adjust very quickly, don’t think for a second that old debt is not affected.”
    Joe, this is true, but just more spin. Otherwise, you are very misinformed.

    This is on top of what we asked about, and that you have not walked back: “With an 0.75% increase in debt service, that comes to about $200 Billion per year in extra payments that we get nothing for. That is an additional $600 in debt for every man, woman and child in the U.S. – every year it is maintained.” This is a bald-faced lie.

    Worse yet, like a true Trumplicant, in the face of contradiction, with experts, with sources, you continue to lie. This is the second time you have run a completely bogus coverage of how our debt is handled. Second time you have told this lie and not walked it back.

    Again, simply stated, to raise Capitol, incur debt, the Fed sells BONDS. BONDS pay interest until redemption when they pay in full. The interest rate is the interest rate and it does not change after the BOND is sold no matter what happens to inflation or the Fed raises their rate. That affects ALL current debt and you are 100% wrong to say what you said above. BUSTED

    Meanwhile, your attempt to weasel-word you response about the market adjusts, while true, is a non-sequitur for a current debt discussion. You not only don’t understand government finance, you double down on stupid. Excellent choice.

    If you had chosen to research, even the Brits in the BBC know: “The government borrows money by selling bonds. A bond is a promise to make payments to whoever holds it on certain dates. There is a large payment on the final date – in effect, the repayment. Interest is also paid to whoever owns the bond in the meantime. So it’s basically an interest-paying “IOU”.” https://www.bbc.com/news/business-50504151

    They are not “raise your rate” BONDs. They are not “floating rate” BONDS. The debt owned by Social Security gets a special rate, special rules, but that wouldn’t make your statement any less a lie.

    Not even sure “The markets adjust very quickly,” has any relevance for old debt whatsoever but obviously NEW DEBT is affected by Fed rate changes. Like I said previously.

    However, perhaps you are alluding to BOND rollovers as they mature and we need to refinance to support the debt —– there, essentially old debt becomes new debt and the total cost goes up. But that’s really new debt Joe, you are still a liar. BONDS can mature in a day or in 30 years, there are in 50 year ones sold and used to sell perpetual as well, but discontinued in 2015.

    That’s how it is.

    Meanwhile, I tossed you a soft ball in suggesting you examine “excess reserves.” There’s $3.6T, down from $4T from Trump-economy but that’s $3.6T in US bank money just sitting there as US taxpayers pay 1.65% interest. Before Obama, banks held $50B in excess reserves.

    Joe, this $3.6T can be left at 1.65%, safe and sound, or with a little risk banks can invest elsewhere, like loans. Current 30yr mortgage return is 6% so you can see where, as the loan interest rises, that Banks may unleash this Kraken.

    We have never had an economy that included this massive excess reserves, doubled during Trump. We don’t know the effect of inflation or rising fed rates on these deposits. It has never happened before in our history, or our economy. If the Kraken is unleashed, it’s more new money than any Trump or Biden stimulus —- fuck, it’s all of them potentially at one time hitting the money supply and the economy.

    Never been here before is the stuff of life for conspiratorialist Trumplicants like yourself. And hard to be the idiot on that one, like you are on this one —– there is no answer, we have never been here. And it’s a lot of cash: $3.6T currently although Biden has brought it down 10% since Trump the borrower left town.

    Reply
    • Joe Gilbertson

      Frank, stop tossing around numbers like you know what you are talking about. For some reason you miss the big picture. (Again).

      If you want to argue, then go pass your series 65, then we will talk.

      Reply
      • frank stetson

        Nope, those numbers are all OK. And many are sourced too.

        Your the one who made up that we have to pay today’s prime on bonds we previously issued mandating a $200B addition. A total fabrication that you continue to refuse to walk back instead issuing childish taunts like the previous. I am betting you didn’t even look that one up but instead just winged it based on your own feelings, nothing more than feelings. But, as most know, sovereign finances are not like managing your meager checkbook, or mine.

        Don’t be so defensive, it’s OK. I am not arguing. I am saying you were and are 100% wrong in your assumption that an increase to the FED rate instantly and automatically raises the rate of existing Bonds the US Treasury has already sold. We do not sell “raise your rate” Bonds. Never did. Never will except in the fantasy world known as Joe’s mind of economics.

        You should either prove me wrong, on the numbers you computed, or walk it back. This dog gonna hunt until you do. Why not. And there’s two of us here now that have tried to point this out to you. I even did it some time back, but did you listen? Did you check? Noooooooo.

        Obviously you didn’t even look at excess reserves, not many do. That’s OK, based on your current treatise, you wouldn’t have a clue anyway.

        And FYI — Series 65 —- I dumped all equities, winners and losers, in Dec, 2021 at some extreme profits, thank you Mr. Biden. Quite often, I give my financial advisors advice, yeah baby. I am sitting on a huge pile of cash as the crash hit. What’s in your wallet, asshole.

        Now before you start telling me pride cometh before a fall, I also did a couple of investments in “springtime pandemic is over equities,” thinking it was time to dip a toe in as the pandemic ended thanks to the boosters. Just before omncron, the inflation, gas, and war popped up. Not to mention fucking DeSantimonious tanking a major revenue producer in FL. Yeah, Disney really looked hot in the early Spring —- suffering a fake streaming downturn, figured I had it made in the shade. Certainly screwed the pooch on that one. Good thing I bought defense EFT just before the war to soften that blow. But pretty much just sitting on a pile of cash profits for now.

        What’s in your wallet? Moths? Well, you’re still working, that’s good. I am off to the new pool. Seem to have a lot of time on my hands as the market bleeds red. We hope it’s day trading time soon, but still a bit early for me, if you know what I mean. Oh, what am I saying, of course you don’t.

        Seriously, I do not know all regarding sovereign financing, global money markets, and even excess reserves, although on that one I am learning fast. But I do know that you were wrong and just can’t admit it or prove me wrong so you play your little word games instead.

        Reply

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