I was thinking about this the other day. I wanted to know something like how much will interest expenses on the debt go up every quarter for the next few years assuming rates stay high and the duration mix stays the same. i.e. what does the cash flow pain curve look like for the next few years. Has anyone written about this?
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.
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