LOWERING FED RATES MAY ACTUALLY RAISE INTEREST ON DEBT
MARKETS CONTROL INTEREST RATE ON DEBT
In recent days we have heard that if the Fed lowers interest rates it will save the government on its interest rates on the debt. The fed rate is the rate for loans between banks and lowering them may help to stimulate the domestic economy, but will not directly affect the rate on the national debt. It is possible that lowering the fed rate will actually cause an increase in the interest on bonds as it may encourage buyers to pay less for those bonds and actually raise the yield or interest rate.
The massive deficits in the budget indicate that the government is increasing the money supply and this will cause less interest in bond buying and a rise in the yield. At present the 10 year is yielding 4.279% and the 30 year is 4.974%. At present the interest rate on the debt is becoming the biggest part of the budget and it is going to get bigger, because their is no way that these deficits can be reduced in the short term. Raising taxes will cause economic decline and cutting spending will have the same effect.
Of course uncertainty and prospects of war and other political disruptions will also cause an increasing or decreasing demand for bonds and will also raise or lower yields or interest rates on the debt.
It is a dilemma and only an increase in productivity and creating of wealth can increase revenues without negatively affecting the economy. While that is possible it may take a long time to change that dynamic. Increasing wealth and a restraint on spending is the only way to move to a more positive outcome. At present it seems there is no national consensus by anyone to take the required steps to change the direction of these factors.
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