patrick.net

Blue says

Too little to control inflation. Raising too high can’t be possible as well as the gov can’t pay interest payment on massive debt.

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Yes, that's the conundrum as future debt will be financed at a higher rate. Look at how now the 10 Year US Treasury is at its highest since 2007, since the Fed Funds rate is at its highest since 2007.

Its a delicate or sensitive optimization effort as Jerome Powell said the primary goal is 2% annual inflation or CPI.

I wonder how the Debt to GDP ratio will fare. It was about 105% just before the pandemic and was above 99% from 2012. It peaked to 135% and now is around 120%.

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ad says

I wonder how the Debt to GDP ratio will fare.

Trump suggested that doing a haircut on the debt could help with this. Seems like he was a master of this sort of thing with his serial bankruptcies.

This low-probably but blockbuster risk is the reason I never went out more than two years on the treasuries.

B.A.C.A.H. says

Trump suggested that doing a haircut on the debt could help with this

Trump is not President. Birdbrain is President.

I just wonder how much debt is growing relative to GDP in 2022. Maybe record tax receipts will help to pay down the debt even more in 2022 so that the Debt to GDP ratio at least stays constant.

I hope we can at least inflate ourselves out of a debt crisis and the Debt to GDP ratio drops to 110% from currently about 120% in the next 2 years.

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ad says

Trump is not President. Birdbrain is President.

You missed my point, I think.

Trump is not president, but he was a sitting president. A sitting president who went on record as candidate suggesting a haircut as remedy.

He is not the only one who has suggested a haircut.

Haircuts on sovereign debt have happened all over the world. He was merely suggesting that maybe it's our turn. He's not the first to suggest a haircut and I'm sure he won't be the last.

B.A.C.A.H. says

He is not the only one who has suggested a haircut.

Not sure as you mean default or not paying as much such as negotiating a better deal like Ecuador's past President Correa did and its current president is trying to do with "restructuring its debt obligations to China".

I'm not sure how that would fare out as far as debt rating and risk of borrowing money in the future, even if other countries are doing it and even if the US dollar remains the reserve currency.

Or they can just cut back on entitlements slightly relative to inflation, as they have been doing for about 2 years as part of the "haircut".

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My mom "restructured" her credit card debt. She promised to not use the credit card as she was paying it off. In return the credit card company dropped the interest rate from around 12% to 2%.

I think this adversely impacted her credit rating for about 12 months after the credit card balance went to $0.

Now how do you scale that to the USA as far as its +$25 trillion in debt and with calls for "haircuts".
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ad says

Now how do you scale that to the USA as far as its +$25 trillion in debt and with calls for "haircuts"

It will wreck pension funds.

And remember, the Social Security Trust Fund is the biggest of them.

rB.A.C.A.H. says

And remember, the Social Security Trust Fund is the biggest of them.

The fund invests in US Treasuries and so should benefit from the rise in rates.

B.A.C.A.H. says

Haircuts on sovereign debt have happened all over the world. He was merely suggesting that maybe it's our turn. He's not the first to suggest a haircut and I'm sure he won't be the last.

So, don't buy any Tbills, right?

The rate hike was less than a lot of people were expecting, and the stock market drops like 500 points. WTF?

ad says

Or they can just cut back on entitlements slightly relative to inflation, as they have been doing for about 2 years as part of the "haircut".

This is what they have been doing with Social Security for decades. Under report inflation by 50%, then base raises on the under reported number. This applies to Federal employees as well.

Al_Sharpton_for_President says

The fund invests in US Treasuries and so should benefit from the rise in rates.

For the new ones, yes. But for the huge bulk of the portfolio of older ones, haircuts will devastate the notional value.

Booger says

So, don't buy any Tbills, right?

It's the reason I don't go out more than two years.

Mentioning haircut was formerly akin to saying "Voldemort" at Hogwarts. By suggesting a haircut on the National Debt, Trump let the cat out of the bag.

So now the concept went from an Unspeakable Black Swan to a mere Black Swan. I am willing to accept the Black Swan risk to the maturities I have for less than = two years. But not beyond that.

I made a calculation that if things come to this, FDIC insurance will be more of a third rail than the treasury debt. As was mentioned on this thread, much of the treasury debt is held by foreign institutions. F*ck them.

FDIC insurance, with its 250k limit, is only for small retail depositors. However you can have just about an unlimited amount of FDIC insurance by spreading multiples of $250K around different banks. Even in banks in territories like Guam , PR, etc.

My political calculation is that the government would use printed money to back FDIC obligations. A haircut on treasury debt will threaten pension funds, (maybe) cause a run on the dollar, but will not lead to pitchforks to the extreme that bank failures would. We learned this from other countries that had debt problems during the financial crisis (Iceland, Greece, Cyprus). Their creditors got haircuts but insured deposits were made whole. That's a political guess by me. Some of you guys will shoot holes through it, whatever. It's my guess. Hopefully things won't come to that.

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A means test for Social Security would be what I would recommend, and/or increase the Social Security tax on those individuals making $200,000 or more a year.

Hold federal spending constant for 2 years during the increase in the Social Security tax.

Then assess the debt to GDP ratio, tax receipts, etc as part of feedback to the above actions.

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Blue says

zzyzzx says

It's 75

Too little to control inflation. Raising too high can’t be possible as well as the gov can’t pay interest payment on massive debt.

Is government owned debt mostly variable interest? Otherwise, rising rates would have no effect on current government debt.

HeadSet says

Is government owned debt mostly variable interest? Otherwise, rising rates would have no effect on current government debt.

Federal debt issued now is based on current rates, so any debt financed with a 10-year Treasury Note is at the current interest rate of around 3.25%.

That is the highest the 10 Year Treasury Note has been since around 2009.

ad says

Federal debt issued now is based on current rates

So that is still only new debt that is affected?

HeadSet says

ad says

Federal debt issued now is based on current rates

So that is still only new debt that is affected?

Yes it is for new debt. Old debt was issued at older rates.

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I listened to Powell say that there won’t be a soft landing and businesses will feel pain in order for the economy to see lower prices. He even mentioned wages lowering also but he mentioned that would be offset by a much lower inflation rate.

Powell might as well say that more productivity is needed to get to the 2% annual inflation goal.

More innovation is needed to increase economic value of goods and services. This will improve standard of living for the working class such as with lower food costs and they have more disposable income such as to save for retirement.

But how much of that is attainable in areas were productivity like with home construction do not matter since local ordinances and laws make it almost impossible to get residential building permits approved.

Florida is a lot different than California as far as that goes. Just look at how St Joe (ticker: JOE) is developing properties in Bay County, Florida.

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HeadSet says

Is government owned debt mostly variable interest? Otherwise, rising rates would have no effect on current government debt.

rate get reset to current level up on term maturity for every bond.

Blue says

rate get reset to current level up on term maturity for every bond.

I see your point so that means the federal government has to manage finances and monetary policy so that interest payments or debt service is not more than 12% of the federal budget. I hope they can grow tax receipts enough to compensate for this increase in debt service payments.

I was thinking about the I-series savings bond as its rate is adjusted every 6 months.

So, if I buy an I series bond now, it will likely go up in 6 months as far as interest payment because by then, the Fed Funds rate (which is now 3.25%) will be at least 4%.

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https://www.cnbc.com/2022/09/21/the-fed-forecasts-hiking-rates-as-high-as-4point6percent-before-ending-inflation-fight.html

The Fed forecasts hiking rates as high as 4.6% before ending inflation fight

Still weak.

https://www.cnbc.com/2022/09/21/treasury-yields-fall-ahead-of-federal-reserve-interest-rate-decision.html

2-year Treasury yield surges above 4.1% after Fed hike, highest level since 2007

Misleading URL.

zzyzzx says

2-year Treasury yield surges above 4.1% after Fed hike, highest level since 2007

Put in my brokerage order for that maturity this morning.

According to Vanguard the forecasted yield at auction on 9/26 is 4.125% annual.

I refused to get the two year at this time last year. The yield then was 30 basis points. I got the 2-yr Treasury FRN instead which pays the market 90-day rate on a daily adjustment. So those are yielding 3.17% today.

Monday's yield estimated to be 4.125%, compared to 0.30% a year ago. This represents a 13x increase in the cost of borrowing for two years, since a year ago.

ad says

So, if I buy an I series bond now, it will likely go up in 6 months as far as interest payment because by then, the Fed Funds rate (which is now 3.25%) will be at least 4%.

There's no formal linkage between the fed funds rate and the ibond base rate.

The base rate is arbitrarily set by the Treasury Department. Lately they've been setting it at zero.

I harangued on this site that the government does not set interest rates, that those are set by the auctions in the marketplace. I was wrong to say that because I forgot about the rates it sets on Savings Bonds. But those are small amounts, only for retail investors.

B.A.C.A.H. says

The base rate is arbitrarily set by the Treasury Department. Lately they've been setting it at zero.

https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm#infl

I checked above, and the total rate is 4.81% for the I-Series bond. It is 0% for the fixed rate and 4.81% for the adjustable rate which is set every 6 months. It was last set this past May.

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ad says

total rate is 4.81% for the I-Series bond

That's for six months. Annual rate is x2 = 9.62%, the rate that's often cited in the media.

B.A.C.A.H. says

That's for six months. Annual rate is x2 = 9.62%, the rate that's often cited in the media.

Yes, I know that total rate 4.81% is only for 6 months.

You are correct as the website for I series bonds states "The composite rate for I bonds issued from May 2022 through October 2022 is 9.62%"

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Read below quote from Bloomberg News. This means that the S&P 500 will only close about 5% higher than its all time high set in February 2020. And accounting for inflation, it would close much lower than the February 2020 level.

" Goldman Sachs Group Inc. slashed its year-end target for the S&P 500 Index to 3,600 from 4,300, arguing that a dramatic shift in the outlook for interest rates moving higher will weigh on valuations for US equities. "

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100 coming up?

Social security is set to rise 8.7% this year. Gotta take care of the Boomers!

https://finance.yahoo.com/news/fed-seen-aggressively-hiking-5-090000581.html

Fed Seen Aggressively Hiking to 5%

zzyzzx says

https://finance.yahoo.com/news/fed-seen-aggressively-hiking-5-090000581.html

Fed Seen Aggressively Hiking to 5%

Yeah, the Federal Funds rate is likely to reach 5% by March 2023. Its virtually guaranteed to reach 4% in November, as it is increased from currently 3.25%. And they likely will increase it to 4.5% in December or January.

If inflation starts to drop from currently 8.2% to below 5% by February next year, then I could see the Fed holding rates around 4.5%.

When inflation holds steady around 3% to 4.5% then I see the 30 year mortgage steadying around 5.5%.

The 30 year mortgage rate has to stabilize and be no more than 5.5% for housing sales or liquidity to not freeze up in 2023.

Its all based on inflation or CPI eventually steadying below 5% as interest rates charged by banks are dependent on inflation.

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https://www.investopedia.com/goldman-sachs-boosts-rate-outlook-to-5-6823502

Goldman Sachs Boosts Rate Outlook to 5%

zzyzzx says

Goldman Sachs Boosts Rate Outlook to 5%

" Goldman Sachs economists said they expected the central bank will lift its benchmark rate to a range of 4.75% to 5% in March, 25 basis points more than earlier expected. The projection assumes an increase by 75 basis points this week, 50 basis points in December, and 25 basis points in February and March. The economists cited three reasons for the Fed hikes beyond February, including “uncomfortably high inflation,” the need to cool the economy, and to avoid a premature easing of financial conditions. "

What happens if the November or December CPI are below 6% ? Do they still cut rates in early 2023 ?

I would expect they increase the Fed Funds rate to 4.25% and hold steady for the first three months of 2023 if that is the case.

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One POV is that inflation will continue, and that the interest rate increases will slow down the economy, possibly leading to a recession. STAGFLATION.

The actions of the Fed are compared to steering a car using the rearview mirror.

November 2, 2PM EDT. Stay tuned.

ad says

What happens if the November or December CPI are below 6% ?

Interesting question, but not very likely to happen.

Lately I am wondering if after the Democrats' wipeout; will the Federal Reserve stop raising rates?
I was just thinking since they will be wiped out so badly the Fed people will not feel any political pressure; "you assholes lost all on your own, not our problem."
So, perhaps the Federal Reserve will continue to raise rates; that is going to suck for guys like me.
OH WELL. Time to kick back in Baja and do some more diving/beaching/exploring/eating/etc.

https://finance.yahoo.com/news/fed-set-to-raise-rates-powell-rate-hike-path-101845316.html

Fed again raises interest rates by 75 basis points

Weak!