Interest Rates - What next?

In a recent post, there was some discussion about interest rates and where they may be going. I mentioned that I should create a separate post to discuss that, so here it is. There have been some recent posts that posited that interest rates are rising due to various factors:

  1. “China selling treasuries”. First of all, they may or may not be selling, it could be that they hold mostly long-term treasuries and their value has gone down due to interest rates going up. It could also be that they are allowing older ones to mature and not reinvesting. And they probably are.
  2. “Fed is doing QT”. This is true. The Fed is allowing their bonds to mature and not replacing them with new bonds. That’s why their balance sheet is declining each month by ~$90B.
  3. “Bond vigilantes”. There is a claim out there that these bond vigilantes are selling (bonds and/or futures) to cause rates to rise to somehow make a bunch of money from those transactions. I don’t quite see how it could work, the risk is high, and if they are leveraged, they could easily get slaughtered. I don’t see any smart money (or big money) doing this. Also, it works FAR better in other currencies that have less liquidity, the US treasury market has the highest liquidity of all.

I don’t think any of these 3 are major factors. I think, by far, the biggest factor is the incessant issuing of new bonds. Not only are we replacing ALL maturing bonds with now ones, but we are also paying ALL the interest due on those bonds with new bonds. And in addition to all that, we are spending way more that is coming in, and ALL that is also being financed with new bonds. What appears to have happened is that the folks out there won’t buy treasury bonds at 3% or 4% anymore, but want closer to 5% or even more. And because we refinance ALL the interest, ALL the time, the numbers keep going higher and higher. For example, we issue a 26-week treasury bill every week; Last week it was for $66B, I recall only a few short years ago that that the weekly issuance was only $36B (like the 11/21/19 ones). Another example, the latest 52-week bill was for $47B compared to the $26B of the 5/21/20 issuance. These are very VERY large numbers. And, of course, it’s why so many people are harping on the big “national debt” number. Obviously as we borrow more and more each week, that number will go up.

So the question is - what will happen with interest rates? And what will happen with inflation? I think there are 3 scenarios:

  1. No recession, mild growth continues. Tax revenue remains roughly the same, grows roughly by GDP growth, say 2%. In this case, we muddle along, but because the spending is growing MUCH faster than GDP, interest rates have to stay high, and perhaps even go a bit higher, depending on appetite for treasury debt.
  2. High growth begins. This is a distinct possibility at some point due to a few things. One, employment has still not reached the pre-COVID level, and it could reach it and even exceed it at some point. Two, business is still good, and we may be able to increase exports as other countries appear to have some mild anti-growth policies, and assorted energy issues. Three, government is spending rampantly on all sorts of things. Four, the automobile replacement cycle has been delayed and delayed some more, someday all those old vehicles will have to be replaced (and there is near zero chance that suddenly everyone will opt for public transport). Five, the electrification phenomenon has only just started and will continue for decades. You will see EVs replacing ICE, you will see heat pumps replacing gas/oil furnaces, and you will see heat pump hot water heaters replace resistive hot water heaters, etc. All these are far more efficient, and make sense energy-wise and cost-wise. Six, businesses that slowed capital spending during COVID are just now starting to grow it. If that continues, we could see some nice growth (first in all the b2b business, later in the new b2c business).
  3. Recession, mild or deep. This is also a possibility. There are a few indications of slowing growth this quarter. And the higher interest rates are not helping matters. If this happens, it could become very dangerous. That’s because tax revenue will go down (all of them, income tax, capital gains tax, and excise taxes) and that directly leads to issuing more treasury debt, and in the absence of enough demand, that leads to higher interest rates. And then there’s the vicious cycle of refinancing all the interest, then all the higher interest, and so on and so on. We could potentially spend ourselves into oblivion (and don’t fool yourself, all parties want to spend more, all governments, everywhere and every time, it’s a universal truth of government). Of course, in a recession, we will attempt to lower rates as much as possible, and that will work for short-term rates, but it won’t for long-term ones. And the trick we used last time, having the fed buy up “all” the debt may not work again. Especially considering that most of that debt from last round is still on their balance sheet today (it’s only gone down from about $9T to about $8T so far).

In fact, in all 3 scenarios, there’s a possibility of spending ourselves into oblivion. I am not talented enough to run the numbers myself, but the simple arithmetic tells us that at some point, and at some rate, the growth in debt reaches a point that isn’t manageable anymore. I don’t know what that point is. But we can discuss it (I won’t be here Saturday and Sunday, but I will definitely look at the discussion on Sunday night).


We need to raise tax receipts. We won’t. We are stupid. So the Fed is stuck with stupid policy options.

d fb


Even if we raise taxes by $500B, or heck a full $1T, it still won’t solve the problem. We will still be refinancing all the old debt, and all the interest on the old debt, and some of our current spending.

No, it won’t. But, like Hamilton, I do not see federal debt as a “problem to be solved” but as a reality to be managed well and to the national benefit, or poorly and to the national detriment.

Raising taxes and acutally collecting them, especially from the rich (Willie Sutton was close to right)*** is what good management requires at this moment.

david fb
***When asked why he robbed banks, Sutton simply replied, “Because that’s where the money is.”


@MarkR an excellent post, as usual.

You wrote, " I am not talented enough to run the numbers myself…"

Here are the long-term forecasts from the non-partisan Congressional Budget Office.

“In CBO’s projections, the deficit equals 5.8 percent of gross domestic product (GDP) in 2023, declines to 5.0 percent by 2027, and then grows in every year, reaching 10.0 percent of GDP in 2053. Over the past century, that level has been exceeded only during World War II and the coronavirus pandemic. The increase in the total deficit results from faster growth in spending than in revenues. The primary deficit, which excludes interest costs, equals 3.3 percent of GDP in both 2023 and 2053, but the total deficit is boosted by rising interest costs.”

The actual numbers and charts are enough to make my hair stand on end. It’s striking that the forecast deficit grows exponentially. It doesn’t decline when the Baby Boomer generation (which uses massive entitlements such as Medicare and Social Security) begin to die off.


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{Fareed: It’s Time for a National Sales Tax

A debate over spending has ended the House speakership of Kevin McCarthy and prompted a wave of reflections on US political dysfunction. As for the issue at the heart of the chaos, in his latest Washington Post column Fareed offers a suggestion to help curtail US deficits: a national sales tax.}'s+Global+Briefing%2C+Oct.+6%2C+2023&utm_medium=email&bt_ee=ujw172O7s20sjjig7aN2UFo6O%2B0SPNxAOwih9Ta0kTeqa1bCFlbHKp8jZTGfzyK9&bt_ts=1696625541404

ralph submits without comment.


Debt is good until it bankrupts you. Like with everything else the difference is in the measure. Same as with body fat!!!

The Captain

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That has been true since 1969 the federal deficit doubles every four years. But that is relaxing with the law of larger numbers.

The issue is the debt-to-GDP ratio. That will decline.

We can not assume the CBO includes the factory buildout. It may split the difference instead of being optimistic. We really should be going with optimism. But this is the MeTAR where GE dies every other day.

Here is the data so far.

The non-partisan Congressional Budget office says, “In CBO’s projections, the deficit equals 5.8 percent of gross domestic product (GDP) in 2023, declines to 5.0 percent by 2027, and then grows in every year, reaching 10.0 percent of GDP in 2053.”

These are professionals. They don’t just pull statements out of their…ear.



I think you misspelled but + 1t…

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All of it is half-baked.

I believe to a degree in god. I do not believe in economists.

I am optimistic about the factory buildout. The difference in my timing is any delays do not matter to me. A delay of six months puts the CBO numbers back a year. It would throw them off.

I think the factory numbers will overheat going forward through the next two decades most years.

As far as the word professional goes most of them will end up on Wall Street happily letting any of us have faith in them. You know better.

What I have to give you is the economists have run a lot of numbers…as forecast. “Tentative” numbers. Not one of the economists you are discussing would say they presented any facts.

The other point, Alan Greenspan made economic forecasts as a partner at Townsend. Among the 12 or so firms making forecasts on Wall Street Greenspan had by far the worst track record. He was still made the Chairman of the FED.

10-year interest rates were abnormally low since 2008 when QE started, and now have returned to a more normal level. 10-year Treasury interest rates are about at the same level as they were before the FED started QE: about 5%. The return on a 10-year Treasury from 2007 to 2017 was around 3% after inflation.

There is a range of possibilities going forward. CAPE indicates that stocks might return 3.3% after inflation in the next 10 years. Adding 2.3% inflation yields an upper limit of 5.6% for the 10-year Treasury. Also, there are many pension funds looking for a 7% yield, and so if rates go that high there will be plenty of buyers. If there are unfortunate events, rates could go to the 9% seen in 1988. Real return on these bonds was about 6%.

10-year Treasury rates decreased from around 14% in 1982 to 0.5% in 2020, and have been increasing since the 2020 bottom.

FED QE started in 2008, increased sharply in 2020, and ended around April 2022 (peak QE).

The Treasury started sharply increasing the supply of longer-term bonds in August 2023.

Fitch Downgrades US Credit Rating

In the CBO projections to 2053, most of the growth in the deficit is from Interest, Medicare, and Social Security. This might cause a financial crisis at some point, but I don’t think it will happen in the next few years, unless we do something stupid like not make payments on time. I know, stupid is now quite possible. CBO projections as percentage of GDP:

2023 2033 2043 2053 change
Revenues 18.4 18.1 18.6 19.1 0.7
Outlays 24.2 24.4 26.7 29.1 4.9
Deficit -5.8 -6.4 -8.1 -10.0 -4.2
Interest 2.5 3.6 4.8 6.7 4.2
Medicare 3.1 4.0 5.1 5.5 2.4
SocialSecurity 5.1 6.0 6.2 6.2 1.1
Medicaid 2.7 2.6 2.9 3.1 0.4
Discretionary 6.5 5.6 5.4 5.4 -1.1
Other 4.2 2.6 2.4 2.1 -2.1

The first four rows might be altered by the end of November.

However many times they get altered…so what!

The issue is the factory buildout. Do we cut infrastructure spending and the CHIPs Act? If so let’s say good night. If not we will dominate the globe again in manufacturing.

Some people argue and want to be taken seriously. Garbage!

The CBO Long-Term Budget Outlook report is produced once a year, and is not revised.
“Each year, the Congressional Budget Office publishes a report presenting its projections of what the federal budget and the economy would look like over the next 30 years if current laws generally remained unchanged.”

Previous versions are available. For example (percent of GDP):
The 2013 Long-Term Budget Outlook

2013 2023 2038
Revenues 17.0 18.5 19.7
Outlays 20.8 21.8 26.2
Deficit -3.9 -3.3 -6.4
interest 1.3 3.1 4.9
Medicare 3.0 3.3 4.9
SocialSecurity 4.9 5.3 6.2
Medicaid 1.7 2.6 3.2
Other 10.0 7.6 7.1

The CBO 2013 projections were close to the 2023 actual numbers, with the exception of Other+Discretionary, which might be higher because of the pandemic.

actual projected
2023 2023 difference
Revenues 18.4 18.5 -0.1
Outlays 24.2 21.8 2.4
Deficit -5.8 -3.3 -2.5
Interest 2.5 3.1 -0.6
Medicare 3.1 3.3 -0.2
SocialSecurity 5.1 5.3 -0.2
Medicaid 2.7 2.6 0.1
Other+Discr 10.7 7.6 3.1

I share your optimism about the future. We seem to always find a way forward.

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