For decades, the U.S government has been spending much more than it takes in from taxes. To make up for the shortfall, it uses debt in the form of U.S. treasury bonds. They currently pay about 5% a year.

They have long been considered risk free. Boring, safe, low return investments. Companies or people who need absolutely reliability in their investments buy them - the elderly, pensions, insurance companies, banks the world over.

The U.S. has issued so many of these bonds that the total amount outstanding right now is $40T. This amount is so staggering that to simply pay that 5% in interest payments costs us more than it takes to fund our very large, expensive military.

If they don't pay it back, and declare all those bonds worthless - well all of those people who were relying on what they thought was a rock solid, safe investment go bust. Banks fail worldwide, pensions run dry, retirement funds suddenly are empty, all kinds of businesses collapse. It would make the financial crisis of 08 look like a joke, and it would be a true catastrophe.

That is almost surely not going to happen.

What could happen is that we enter a debt spiral - investors get worried we won't be able to pay it back, and view bonds as less than perfectly safe. They now want 6%. The U.S. has to pay even more in interest every year, so they issue more debt to roll it over, which makes it worse and we get to 7%, etc.

Typically in this situation, a country either quickly gets its act together and commits to reducing spending and raises taxes, or they just turn on the money printers, and use inflation to make that debt smaller in real terms. I have little faith in the U.S. to commit to fiscal austerity and expect them to try to inflate the debt away.

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tadfisher 14 hours ago | parent [-]

The question is, are we going to have another Volcker willing to raise the prime rate to 20% to counteract our useless legislative branch? Or is the idea of an independent central bank dead at this point?

	▲	cherryteastain 13 hours ago \| parent \| next [-]
		Doing that in the middle of the AI bubble would be a huge systemic risk to the US and world economy. Expansion of the US economy is now largely driven by the colossal amount of data centers being built. No one anywhere in the world would invest in risky data centers, LLM company IPOs etc if they could get a 30y 20% bond. Financial institutions like investment banks, hedge funds rely on the AI musical chairs to justify the trillions of commitments on their balance sheets. A Volcker style rate hike would trigger a dash for the exit and cause the collapse of some of these institutions, risking a domino effect rippling through the entire economy. Plus it'd also massively increase USG deficits since all the debt that's added and rolled over would be financed at that elevated rate. At that point, cuts would amplify the above domino effect (cf. Kalecki Levy equation) reducing tax intake, but no cuts would mean unleashing a debt spiral.
	▲	rubyn00bie 13 hours ago \| parent \| prev [-]
		I don’t think raising rates like “Tall Paul” (Volcker) did would help in this situation. We are in a bit of a pickle. Raising rates would cause the servicing costs to become enormous and would likely just result in even more debt. The alternative, lowering rates, would likely cause a massive spike in inflation. Inflation makes the debt easier to manage because it’s worth less, but then that wreaks havoc on everyone (especially folks on fixed income). I think the only way out is to reduce military spending, nationalize the health care system, and tax the hell outta the ultra wealthy. But I suspect that won’t happen at least based on the current oligarchy running the country. It’s really unfortunate too, because we could be taking on debt to invest in citizens like making college free, improving teacher salaries, and general infrastructure but… we ain’t.