I don't understand how higher debt service is inflationary.
The Fed has a dilemma, almost a race, between two things as they raise rates here.
1) Raising rates generally results in tighter borrowing standards on a lag. This can reduce lending-driven money creation and lead to disinflationary demand destruction around the margins.
https://void.cat/d/LciK171UhVRj6yZuNHk2u7.webp
2) At high public debt levels, raising rates also increases federal interest expense, which increases the fiscal deficit, which is a source of ongoing inflationary stimulus into the economy.
https://void.cat/d/FX7vWUrUF4kiNidN1g5PQ3.webp
In the 1940s, inflation was fiscal-driven and public debt was high.
In the 1970s, inflation was mostly lending-driven and public debt was low.
Currently, the Fed is using a 1970s-style playbook to deal with 1940s-style fiscal-driven inflation.
Discussion
A fiscal deficit is a surplus for the private sector. Higher debt service results in a larger deficit, which means more money will enter the economy through the interest rate channel.
Basically, the treasury, which already runs a fiscal deficit, to pay the rising interest on its bonds and other debts, needs to issue more bonds, which, if they are bought by the FED, is basically money printing. Correct?
I see, if the money doesn't come from taxes.
However, in the aftermath of 2008, they did QE but didn't lead to inflation because the $ went to rich bond holders (that's my probably flawed understanding). In 2020 the money went to plebs which led to inflation.
So, like, if you pay higher debt service, doesn't that repeat the 2008 model ?
***Disclaimer*** I'm an irredeemable idiot.