Serious question, that has me worried

[Beefalow and the Consumer]

My very, very brief primer on national debt and monetary policy:

1. Fiat currency is a medium of exchange, not a store of value.  Value is in tangible things or the ability to make or do tangible things, while fiat currency only represents those things in the abstract.  Inflation is not taxation.  If McDonald's decides they need another 50 cents for a Big Mac, that money doesn't go to the government.  The important thing is that Big Macs keep getting made, and the value of your work can be converted appropriately into Big Macs.

2. Don't think of the US as a family household that's run up their credit card.  Think of the US as an enormous company that everyone in the world keeps investing in because it's one of the safest businesses on earth.  The value of the US is dependent on the ability of the economy to generate revenue.  And its ability to raise cash through the sale of bonds is one of the things that allows the economy to keep moving and generating revenue.  While this confidence could someday come crashing down, it's unlikely to unless something catastrophic happens.  And if/when it does, the run on US debt will be just one of many problems.

[SirMuxALot]

1. Fiat currency is a medium of exchange, not a store of value.  Value is in tangible things or the ability to make or do tangible things, while fiat currency only represents those things in the abstract.  Inflation is not taxation.

Of course currency is a store of value.

You can ask people who have lived under hyperinflationary situations.  Very often you would see them cash their paycheck at the bank and literally go across the street to the nearest retail store and buy anything, even something they didn't need.  All in order to exchange their "store of value" from something eroding on an hourly basis to something with some value stability.

Government borrowing more valuable dollars now and repaying with less valuable dollars later is of course a form of taxation.  Normally the interest rate on a bond covers the "cost of money", but only the federal government has the power to unilaterally abrogate the interest rate by "printing" new currency which inherently devalues all existing store of value (i.e. currency already in other hands).

Look at it this way.  The President of Zimbabwe borrowed $500 dollars from you in the summer of 2007.  That $500 at that point in time could buy you a nice suit.  So you exchanged the equivalent of a nice suit to Mugabe and we went out and got a nice suit.

Then in the summer of 2008, the President repays you the $500 plus the nominal interest rate (say 10%) agreed to at the time of the contract (bond).  So you get your $550 he owed you.

But now of course, those hyper-inflated $550 Zimbabwean dollars only gets you one 2 liter bottle of water.  A nice suit now costs six figures.  That transfer of value exited your pocket.  That full value did not transfer to any private citizen.  Only the government received the bulk of that $500 value.  That, by any reasonable standard, is taxation.

[BoAtlantis]

"Long run fiscal sustainability in the US will require some combination of cuts in currently promised Medicare, Medicaid and Social Security benefits and/or tax increases that include higher taxes on households with incomes below $250,000."

http://www.igmchicago.org/igm-economic-experts-panel

Vast majority of renowned economists agree that some kind of tax raises and promised benefits are necessary in order for us to have fiscal policy.

Republicans' slogan of "Give rich people tax cuts and we will pay for the debt with economic growth" is a fantasy.

[Higgs]

So what exactly happens if we don't pay our debt down? Will this lead to crisis?

I'm genuinely curious and not trying to start an argument or anything, I think this has been a really good thread.

[MaxQue]

So what exactly happens if we don't pay our debt down? Will this lead to crisis?

I'm genuinely curious and not trying to start an argument or anything, I think this has been a really good thread.

It's only an issue if your debtors think you cannot pay it back. It's not the case at all for United States (none the less because it would make US dollar crash, but the debtors mostly have their investments in US dollars, so it's totally not in their interest).

[SirMuxALot]

So what exactly happens if we don't pay our debt down? Will this lead to crisis?

Debt is not a problem until it becomes a problem.  I know that sounds flippant, but that's the nature of debt crises.  They tend to come on suddenly.  The 20th century (and the last 15 years also) have lots of examples of sovereign debt crises for countries other than the USA.  They nearly all come down to one fundamental factor: the country can no longer borrow enough new money to pay down current debt obligations.  Stated another way, they are unable to roll over their debt.

Remember what a 5/10/30 year bond is.  The government borrows X dollars from you now and promises Y dollars 5/10/30 years from now (zero coupon example, with no yearly interest payments).  So 5/10/30 years from now, the government must have Y dollars to pay you back, or else it will default.  And defaults tend beget downward spirals where more defaults follow, etc.

Of course, for the USA at present, it's very easy to just go out and borrow Y dollars again, and kick that promise to repay down the road, because there are lots of people willing to accept that 5/10/30 year promise today.  In some respects, it's a little bit of a pyramid scheme of debt.  As long as enough new people (or repeat customers, as it were) are willing to take a new bond issue, the government can continue to service its debt.

Debt service gets easier when interest rates are going down.  You can repay old bonds that pay a higher interest rate (say 5%) with a new bond that only pays 1%-2%.  That has been happening in a big way to US debt since the 1970s.  That is one of the reasons why the significant debt increases over the last half century have not led to dire consequences as yet.

But at some point, we may see this once in a lifetime secular decline in interest rates reverse.  That will make servicing 20 trillion in debt much more difficult.  Interest as percentage of the federal budget (and as percentage of GDP) may increase significantly.

Theoretically we could continue borrowing until 100% of our entire GDP goes to paying interest.  In practical reality though, the bond markets tend to break down before that.  At some point, people with money to lend will be wary enough to not want to lend money to the USA, for fear that the government will not be able to pay it back.  

That is what happens in most sovereign debt crises.  It can be hard to see coming.  On week your federal debt auction goes well (what they call bid to cover ratio, which is to say, does the government have enough "paying customers" for the debt they want to issue).  The next week your bid to cover ratio drops below 1.0 and your have a failed debt auction.  Then another.  And another after that.  That's when a debt crisis begins.

[parochial boy]

2016election, the national debt peaked at about 120% of GDP shortly following World War II in 1946.  By 1980, debt as a percentage of GDP had fallen to 30%.  How do you think that this happened, considering that at no point between 1945 and 1980 was the federal budget balanced?

Hint:  Not trying to be facetious; this is a very important math/economics/civics lesson.

Please elaborate as i may be missing the obvious point you are trying to make, thank you.

Considering that the national debt was being added to every year between 1945 and 1980 (as there were no balanced budgets during that time), yet debt as a  % of GDP fell from 120% to 30%, what must have happened?

Hint:  Remember, that we are COMPARING debt to GDP.  So if debt is going ↑, how is debt as a % of GDP going ↓?  What must the relationship be between the change in debt and the change in GDP?

I really want you to get this.

Say you earn $100 a year and you are $100 in debt. You are in debt by 100% of your income.

If your income grows by 5%, and you borrow 2% of your income, you are now $102 in debt and earn $105.

So your debt to income ratio has falled below 100%.

Lesson being, you can have deficit spending in perpetuity if your economy is able to grow.

Do I win?

[hurricanehink]

Some great posts on here. I'll add that we need to focus on the terms before talking about the solutions, and while I don't have an economics degree, this is my understanding (aided by some helpful Wikipedia pages).

Deficit/Surplus - the amount of money over/under when comparing the amount of money spent (expenditures) to the amount received (revenue). Under the Obama administration (largely due to the forced spending cuts from the GOP), the deficit fell from $1.4 trillion to $474 billion, while the revenue rose from $2.1 billion to $3.5 billion. In 2000, the surplus was $236 billion, which became an issue in the 2000 presidential election on how to spend that.
Debt - the cumulative deficit over time. The current debt is approaching $20 billion, but this includes $5.4 trillion in intragovernmental holdings (Medicare, Social Security, and the Federal Financing Bank). The public debt is around $14 trillion, of which $6.2 trillion is owned by non-Americans.
Gross domestic product (GDP) - the overall economic output of a country, which as of 2015 is $18.558 trillion. You can divide the debt into the GDP for a ratio, but it depends whether you do overall debt (106.71%) or just public debt (75%). 15 other countries have a higher debt to GDP ratio.

As other users noted, the US's debt to GDP ratio was highest after World War II, but the debt wasn't an issue due to the large growth of the economy in the 50s and 60s.

https://www.whitehouse.gov/sites/default/files/omb/budget/fy2017/assets/hist03z1.xls - thanks to this excel file from the White House, we can see how much has been spent over the decades. In 1946 (peak debt percentage), national defense was 77.3%, human resources (veterans benefits and income security mostly) was 9.9%. By 1966 (highest GDP post-50s), national defense had fallen to 43.2%, human resources was up to 32.2%, and physical resources (natural resources and housing credit) was 10%. However, a full 12.6% of the budget was toward other functions, such as the Space agency, international affairs, and agriculture.

Now, the national defense is 15.3% of the budget ($604 billion), but 72.7% ($2.87 trillion) of the budget goes toward human resources. This is likely the number that has made so many Republicans want to cut government spending. But let's take a closer look. Of the $2.87 trillion, $929 billion goes to Social Security, $595 billion goes to Medicare, $528 billion goes toward income security, $525 billion toward health, and $113 billion toward Education/Employment Training/Services. Interest on the debt was 6.1% of the debt in 2015 ($223 billion), more than the 4.6% share ($169 billion) for "other functions".

This is where government policy comes into play. There is only so much revenue each year, and many programs are relied on year after year. We've gotten to a point where too many programs are too valuable, mainly Social Security, one of the 3rd rails of politics. According to the Social Security Trust Fund - https://www.ssa.gov/oact/progdata/transactions.html - 2015 was the first recent year where Social Security paid out more than it brought in, and 2016 is on track to do the same. One way of bringing in more revenue for Social Security is raising the maximum amount of taxable earnings, which is currently $118,500. (If you make $1 more than that, you'll pay the same social security)

Given the income inequality in the country between tax rates of the richest and the average Americans, the solution for taking care of the debt is having a more fair tax code to bring in additional revenue, raise SS salary cap, boost funding for science/space/technology and infrastructure (proven in the 50s and 60s to increase the economy), cut the military spending slightly (and eliminating active troops where possible so not to increase future veterans' spending), and have a new Simpson-Bowles type committee to find savings wherever possible.

[ag]

Okay forget the arguments over the election. Let's say the polls are right or close to it and Hillary wins Nov. 8th and becomes president.

How are we going to dig ourselves out of $17trillion in debt? We cant keep losing Billions a year and expect life to continue as it is. This by no means is a shot against her, any party, or any person. When our debt is now 73% of our GDP its a MAJOR MAJOR problem. The interest alone on the debt is crazy.

What can we do as a country to fix this? Is it already too late? How do we start paying this down.....

Well, I guess you only are concerned about Clinton´s victory in this respect, because we all know exactly what Trump will do: declare bankruptcy.

[ag]

So what exactly happens if we don't pay our debt down? Will this lead to crisis?

I'm genuinely curious and not trying to start an argument or anything, I think this has been a really good thread.

Yes, it would be a major crisis, not only for the US, but for the rest of the world as well. In fact, it would not be a short-term crisis, but a permanent shock, with pretty dire consequences.

At this point, US Treasuries are viewed as the safest thing out there. As a result, US pays very little interest on its borrowing, and, in fact, whenever times are uncertain, those rates tend to fall further: everybody runs to the safest asset around. If the expectation is that US might default, this is no longer going to be the case. So, the US will wind up permanently paying more whenever it needs to borrow - and would have to pay still more, not less, in hard times. The outcome would be a completely new equilibrium, with substantially poorer United States. And adjusting to that equilibrium would be very, very painful.

The good news, there is a reason US debt is considered the safest thing out there. And, to put that very simply, that reason is that there is simply no reason why US might have to default.

[ag]

but also increase foreign spending.

What do you mean by "foreign spending"? US non-military spending on all sorts of "foreign" programs is an infinitecimal part of the budget. Are you expecting her to increase it by a factor of a 100? Why?

[ag]

When Clinton takes office, the national debt will be rather close to 20 trillion, not 17 trillion.

Okay, that's not comforting, what can she do to start paying it down? The interest alone is going to be huge. We can argue all we want about the election who we like ect. but this is something that really really worries me. Again, this is a problem created by everyone, blaming one side or the other isn't a solution....can we do something about this and what?

US pays very low interest on its debt. Nobody else comes close. Markets do not perceive any problem with US ability to pay its debts. What is the problem, exactly?

[Beefalow and the Consumer]

1. Fiat currency is a medium of exchange, not a store of value.  Value is in tangible things or the ability to make or do tangible things, while fiat currency only represents those things in the abstract.  Inflation is not taxation.

Of course currency is a store of value.

You can ask people who have lived under hyperinflationary situations.  Very often you would see them cash their paycheck at the bank and literally go across the street to the nearest retail store and buy anything, even something they didn't need.  All in order to exchange their "store of value" from something eroding on an hourly basis to something with some value stability.

You just stated my point.  A dollar is not a thing that stores value, it's a measure of relative worth.  It's only worth what you can get for it right now, whether you are in a hyperinflationary or deflationary economy.

Government borrowing more valuable dollars now and repaying with less valuable dollars later is of course a form of taxation.  Normally the interest rate on a bond covers the "cost of money", but only the federal government has the power to unilaterally abrogate the interest rate by "printing" new currency which inherently devalues all existing store of value (i.e. currency already in other hands).

Any debtor who pays back a loan with inflated currency gets a benefit, not just the government.  And yes, when the central bank is directly under the control of the government, then the government can print its way out of debt, effectively taxing the economy.  The US Treasury cannot do this because it doesn't control the monetary policy of the Federal Reserve.  The Fed is not concerned with politics, only price stability and controlling unemployment.

The expectation of inflation is also baked into interest rates.  In an inflationary environment, interest rates go up.  The fact that the Fed can set the funds rate at next to zero (or zero), and the market accepts this, indicates that the market doesn't expect inflation.

But that's beside the point.  The point is that the federal government cannot print its way out of debt.  That's not how it works.  The Federal Reserve controls the money presses, and they're not going to allow inflation just to enable a government fiscal policy.  The Fed doesn't give a rat's ass about fiscal policy.

[SirMuxALot]

US pays very low interest on its debt. Nobody else comes close. Markets do not perceive any problem with US ability to pay its debts. What is the problem, exactly?

There are plenty of countries that more than come close.  For example, Japan effective yields are negative across all terms except 30 year.  And their 30 year yield (0.48%) is well lower than US 30 year yields (2.49%).

Other countries with lower yielding 30 year long bonds: UK (1.7%), Germany (0.6%), Austria (~1.2% equiv), Belgium (0.7% 20y), Canada (1.8%), Czech Republic (1.8%), Denmark (0.7%), France (1.2%), Netherlands (0.7%), Spain (2.2%), Sweden (1.0% 25y), Switzerland (0.05%), Taiwan (1.6%).

Now the nature of the bond market is that we can't know with 100% certainty why this difference in rates exist.  Decades ago, we could have easily chalked this up to forex inconvenience.  Someone living in Germany would have extra expense and effort in trying to invest in US debt for a higher rate.  But these barriers have all but evaporated in the modern world.  It's fairly easy for a German to buy US debt these days.

Now there is certainly a component that is interest rate risk - which is to say, we seem fairly certain the Fed is set to raise rates in December (or January at the latest).  This will pull rates up a bit, as investors anticipate getting "a better deal" only a month or two down the road.  But this probably doesn't explain the full 1-2% delta (or 2.45% in the case of Switzerland), since even the Fed itself tells us they aren't forecasting more than half a point of rate increases to the end of 2017.

Is it possible there's a default risk premium?  Well, not any time soon...the default risk for the USA will be as close to zero as those other countries listed as of today.  But what about the default risk for the life of the bond?  That's 30 years down the road!  If you're lending a government money on a 30 year bond, you are essentially compelling yourself to predict the next 30 years!  And that could arguably be why we see higher US rates.

Generally in the past, sovereign debt yield premiums tend to track a lot of things.  Political stability, economic health, etc.  But a significant component has always been government debt serviceability.  And not even the US is immune to that.

Anyway, while I have been trading bonds for 25 years, I hope not to come across as some know it all.  This is just my opinion and interpretation of the market forces that drive the global bond (and stock) markets.

[SirMuxALot]

You just stated my point.  A dollar is not a thing that stores value, it's a measure of relative worth.  It's only worth what you can get for it right now, whether you are in a hyperinflationary or deflationary economy.

Forgive me, but I strongly disagree.  A dollar bill's only utility is its ability to store value.  You don't make jewelry out of it (like one does with gold), you don't hang it on your wall and admire it (art/collectibles), you don't get a rate of return on it (stocks), and you don't make widgets out of it (industrial commodities).

It is *purely* a store of value.  And the only reason for people to rid themselves of it as quickly as possible (like a hot potato) is because of inflation.  Even in low inflation times, you don't stuff it under your mattress because of the erosion of the stored value.

The relative worth is not defined by the dollar itself.  The relative worth is established by the two ends of the product exchange.  If a baker wants to trade bread to the butcher for some steaks, they can come to a fair exchange rate of loaves of bread to ribeyes without the need for a currency exchange.  But the fact that loaves of bread go for X dollars and ribeyes go for Y dollars is independent of the dollar itself.  That exchange rate is set by the supply/demand markets for each of those products.

For example, if we somehow issued an edict that tomorrow morning, we would add two zeros to every dollar in the entire economy...guess what?  Nothing would change!  Your bank account would be 100x tomorrow, your salary would go up 100x, the price of bread would go up 100x, and the price of ribeyes would go up 100x.  So it would be obvious that the currency itself did not establish the relative value of goods, it is the markets for those goods itself that set the exchange.

Perhaps we're missing the definition of "store of value" here.  The dollar as a store of value is often very temporary.  Your employer can't give you bread and ribeyes and everything else you want, so instead the employer stores the value you are given for your work via US dollars.  You may store that value for only a few minutes on payday, as you head to the grocery store to get some ribeyes.  Or you may store that value for years under your mattress.  Generally though, we recognize that dollars can erode in value, so we put saved value into our 401k or savings accounts, etc.  401ks and savings accounts I don't consider stores of value, they are more a hedge or investment, as the main objective of those financial instruments are not to just purely store the value, but instead to provide a return...to put the capital to work while you don't need it.

[ag]

US pays very low interest on its debt. Nobody else comes close. Markets do not perceive any problem with US ability to pay its debts. What is the problem, exactly?

There are plenty of countries that more than come close.  For example, Japan effective yields are negative across all terms except 30 year.  And their 30 year yield (0.48%) is well lower than US 30 year yields (2.49%).

Other countries with lower yielding 30 year long bonds: UK (1.7%), Germany (0.6%), Austria (~1.2% equiv), Belgium (0.7% 20y), Canada (1.8%), Czech Republic (1.8%), Denmark (0.7%), France (1.2%), Netherlands (0.7%), Spain (2.2%), Sweden (1.0% 25y), Switzerland (0.05%), Taiwan (1.6%).

Now the nature of the bond market is that we can't know with 100% certainty why this difference in rates exist.  Decades ago, we could have easily chalked this up to forex inconvenience.  Someone living in Germany would have extra expense and effort in trying to invest in US debt for a higher rate.  But these barriers have all but evaporated in the modern world.  It's fairly easy for a German to buy US debt these days.

Now there is certainly a component that is interest rate risk - which is to say, we seem fairly certain the Fed is set to raise rates in December (or January at the latest).  This will pull rates up a bit, as investors anticipate getting "a better deal" only a month or two down the road.  But this probably doesn't explain the full 1-2% delta (or 2.45% in the case of Switzerland), since even the Fed itself tells us they aren't forecasting more than half a point of rate increases to the end of 2017.

Is it possible there's a default risk premium?  Well, not any time soon...the default risk for the USA will be as close to zero as those other countries listed as of today.  But what about the default risk for the life of the bond?  That's 30 years down the road!  If you're lending a government money on a 30 year bond, you are essentially compelling yourself to predict the next 30 years!  And that could arguably be why we see higher US rates.

Generally in the past, sovereign debt yield premiums tend to track a lot of things.  Political stability, economic health, etc.  But a significant component has always been government debt serviceability.  And not even the US is immune to that.

Anyway, while I have been trading bonds for 25 years, I hope not to come across as some know it all.  This is just my opinion and interpretation of the market forces that drive the global bond (and stock) markets.

Well, true, you are right, I was thinking of the short-term borrowing, not of the 30-year bonds. And, of course, once we go out to longer terms, we should not forget inflationary expectations - which would, probably, largely account for the difference (at least, as long as we are talking of debt denominated in the national currency/euros).

As for the default risk.... The big problem is that it is hard to imagine a short- to medium-term situation in which US defaults, without this provoking a major financial crisis worldwide. If US stops paying its debts, liquidity would dry up everywhere. The consequences of this would, of course, be extremely dire. Of course, when we are talking of extremely rare events: still more, events like this, which are essentially uninsurable, it is very hard to have anything resembling good estimates of likelyhoods of such occurances - and, hence, effect on prices. Nobody, really, should claim to understand this well.

There is, of course, always a risk of that happening - however, to the extent this can be understood, that risk is fundamentally very much political. It can conceivably happen only because of a political decision on the part of US government/Congress not to pay. As of today, the greatest contributor to such a risk would be electing Donald J. Trump - a candidate who pretty much openly suggested that he would like to default.

[SirMuxALot]

Any debtor who pays back a loan with inflated currency gets a benefit, not just the government.

But for every beneficiary (net debtor) of inflation there is an offsetting person (net creditor) who is on the detrimental end of that exchange.  For the private sector, it is entirely a zero sum game!

Only the entity issuing the fiat currency can benefit from the inflation.

Think of a perfect counterfeiter.  He creates currency that doesn't get caught at the bank, and it enters the economy.  Such a person is inducing micro-inflation.  And only he is the beneficiary of that inflation.

[SirMuxALot]

It can conceivably happen only because of a political decision on the part of US government/Congress not to pay. As of today, the greatest contributor to such a risk would be electing Donald J. Trump - a candidate who pretty much openly suggested that he would like to default.

What you are describing is a selective default.  A pro-active decision to not pay debt holders.  They are exceptionally rare.  Argentina did one in 2014.  It was quite harmful.

But non-selective defaults are often worse.  Greece has essentially done this several times over the last few years.  They tend to be even more harmful.

Selective defaults can sometimes lead to a favorable debt restructuring which will allow a responsible government to exit the dire situation they are in.  Non-selective defaults often lead to death spirals which lead to much more severe economic consequences.

Trump engaging in a selective default at any point in the next four years would probably be exceptionally foolish.  I'm of the opinion that he won't he won't have such an opportunity (win or lose).

But likewise, any politician that affects policies that lead us down the path towards a non-selective default (however far into the future) should also be the recipient of our criticism.

[Beefalow and the Consumer]

Any debtor who pays back a loan with inflated currency gets a benefit, not just the government.

But for every beneficiary (net debtor) of inflation there is an offsetting person (net creditor) who is on the detrimental end of that exchange.  For the private sector, it is entirely a zero sum game!

Only the entity issuing the fiat currency can benefit from the inflation.

Think of a perfect counterfeiter.  He creates currency that doesn't get caught at the bank, and it enters the economy.  Such a person is inducing micro-inflation.  And only he is the beneficiary of that inflation.

The risk of inflation is built into the interest rate.  Whether you are a person taking out a mortgage, a corporation issuing bonds, or a country issuing debt obligations.  There's always a risk to the creditor that the principal will lose real value, or a risk to the debtor that the principal will gain value and be more difficult to pay.  Risk is inherent to any financial exchange.

The United States government has no power to directly induce inflation and weasel out of debt; monetary policy is insulated from politics.  Without this you could have a Zimbabwe or Weimar Germany, but we have an independent central bank.  Furthermore, all new money created is balanced with a debt obligation.  In our system of central banking you can't pay off debt with new money.

[ag]

But likewise, any politician that affects policies that lead us down the path towards a non-selective default (however far into the future) should also be the recipient of our criticism.

True. But none of the current US politicians seems to qualify.

[SirMuxALot]

The risk of inflation is built into the interest rate.

The only inflation adjusting fixed rate instrument that I know of are TIPS.  And even they may not have an accurate peg, as Bureau of Labor and Statistics inflation figures have a large subjective component.

Large shifts in inflation rates almost always cause significant re-pricing in bond and securities markets.  That re-pricing is an inherent acknowledgement by the market of a mis-pricing of inflation.  It is not without cost to the economy.  Richard Nixon and Jimmy Carter could tell us a lot about that.

The United States government has no power to directly induce inflation and weasel out of debt; monetary policy is insulated from politics.

Yet here we are today, with an independent Fed keeping interest rates at emergency level for nearly an entire two term Presidency.  The insulation is paper thin.  Don't get me wrong, that's not an accusation against Yellen.  She's not corrupt, she's merely human.  It's just natural confirmation bias that all humans are prone to make.  An independent Fed can easily make the same human mistakes any politician can.

And it's easy to see how a Fed chair will be subject to confirmation bias style mistakes in the future, as they surely will understand that raising interest rates will blow a big hole in debt service portion of the budget.

You may also recall that Nixon did not re-nominate William Martin in 1970 and installed Arthur Burns as Fed Chair, who was a strong believer in easy monetary policies.  Those policies persisted on into Carter's term.  Paul Volcker was heavily and widely criticized in 79-81 when he decided to take the fed funds rate to 20%.  Everyone praises him now in hindsight.  But his actions were highly controversial at the time.  Burns and Bill Miller (Carter's 1978 nominee) were smart men, not corrupt, yet they failed to see the correct course of action that only Volcker finally took to tame inflation.

[Beefalow and the Consumer]

The risk of inflation is built into the interest rate.

The only inflation adjusting fixed rate instrument that I know of are TIPS.  And even they may not have an accurate peg, as Bureau of Labor and Statistics inflation figures have a large subjective component.

Large shifts in inflation rates almost always cause significant re-pricing in bond and securities markets.  That re-pricing is an inherent acknowledgement by the market of a mis-pricing of inflation.  It is not without cost to the economy.  Richard Nixon and Jimmy Carter could tell us a lot about that.

The re-pricing of bonds (which is what drives interests rates when you get down to it) is the market baking inflation risk into interest rates.  If I think prices are going to rise significantly over the term that I'm lending to someone, I'm going to demand a higher rate.  Just as I'm going to demand a higher rate if I believe the debtor is more likely to default.  But risk is called risk because the outcome is uncertain.  The market may believe inflation will go up, and it doesn't, or vice versa.  The important thing is that funds move, business has capital and can hire people, and people can buy homes.  The important thing is that abstract money can feed concrete economic activity.

The United States government has no power to directly induce inflation and weasel out of debt; monetary policy is insulated from politics.

Yet here we are today, with an independent Fed keeping interest rates at emergency level for nearly an entire two term Presidency.  The insulation is paper thin.  Don't get me wrong, that's not an accusation against Yellen.  She's not corrupt, she's merely human.  It's just natural confirmation bias that all humans are prone to make.  An independent Fed can easily make the same human mistakes any politician can.

It is not a mistake (IMO) to keep rates low when there is little sign of inflation and funds are not flowing significantly to fuel economic growth.  It may be a mistake to keep rates low for other reasons - because it punishes people living on fixed-payment instruments, and because of the massive hangover that will happen when the Fed finally takes the punchbowl away and stocks crash as a result.  (If I can get a larger return on bonds, I'm going to demand an even larger return on stocks, which drives down price.)

And it's easy to see how a Fed chair will be subject to confirmation bias style mistakes in the future, as they surely will understand that raising interest rates will blow a big hole in debt service portion of the budget.

The government will have to pay a higher rate on new issues (treasuries will sell for a lower price at auction) but on debt already issued, the rate will remain the same.  Hopefully that leads to more responsible fiscal policy - I believe the cost of debt is built into the budget and the resulting deficit projections will become a matter of political import.  lol.  No, really.  But at the very least, the cost of revolving debt will have political consequences.

The upshot of all of this is that deficit is certainly critical, but the debt itself is simply a way for the government to leverage its massive power to collect revenue.

You may also recall that Nixon did not re-nominate William Martin in 1970 and installed Arthur Burns as Fed Chair, who was a strong believer in easy monetary policies.  Those policies persisted on into Carter's term.  Paul Volcker was heavily and widely criticized in 79-81 when he decided to take the fed funds rate to 20%.  Everyone praises him now in hindsight.  But his actions were highly controversial at the time.  Burns and Bill Miller (Carter's 1978 nominee) were smart men, not corrupt, yet they failed to see the correct course of action that only Volcker finally took to tame inflation.

Inflation is a complicated beast.  The end of Breton Woods certainly shocked confidence in currency.  We also had productivity issues, in which the value of goods and services in the economy did not keep up with the funds available to pay for them.  Easy money went into pockets, but didn't lead to more wealth.  Today we have the opposite.  Easy money stays in cash reserves of financial institutions still shocked by the 2009 crisis, and not in the pockets of consumers.  Meanwhile we have a boom in productivity.  The "jobless recovery."  Lots of stuff to buy, not enough increase in available money to pay for it.  This is why Yellen takes a look at inflation, says "nope, still not enough," and keeps rates low.

[ag]

Yet here we are today, with an independent Fed keeping interest rates at emergency level for nearly an entire two term Presidency.  

Has there been a big spike in inflation during this time? If not, why is this not the optimal thing to do? Or is the job of the Fed not to control inflation, but to prevent expansion?

[Pericles]

Hillary will not be able to address the national debt. She is going to raise taxes, but also increase foreign spending. It will just keep climbing until there is another recession. Interest rates are expected to go up. It will only get worse if she is elected.

Ha ha no her plan had little effect on the debt. Taxes increases decrease the debt and would be focused on the 1% and reduce income inequality, while foreign spending is almost nothing in the general budget. But you had to vote for the guy who would cut taxes for himself(and raise it for millions of middle-class families) and this would result in the debt going up by trillions upon trillions of dollars. Trump will do nothing about the debt. If this is paid for, it would be with brutal and painful cuts to social spending and entitlements. If the debt is a problem, which it isn't really, trump's election will make it significantly worse. Next time, do your research.