Higher interest rates may not be an unmitigated disaster for the world’s largest debtor. From Wolf Richter at wolfstreet.com:
Bring them on. Financial Repression has a huge cost.
Yields have been rising in anticipation of a tightening cycle, and they will rise further when the Fed actually raises rates and engages in quantitative tightening (QT). Rising yields reduce bond prices for investors who sell those bonds. Investors that hold bonds to maturity earn the yield at which they purchased the security, and at maturity they get paid face value. A few hedge funds might blow up along the way because their highly leveraged bets went awry. So for current bondholders, a tightening cycle is not pretty.
But for future bond buyers and for savers, a whole new world opens up: a world with more income. And this higher income will throw off more tax revenues for governments. So how much money are we talking about here? $67 trillion in assets that will generate higher incomes.
There has been a lot of talk how the Fed can never raise interest rates because of x,y, and z, and how the Fed can never do QT because of x,y, and z. And one of the reasons often cited is that the US government wouldn’t be able to afford the higher interest payments. But that’s a red herring.
First, the US government issues its own currency and can always pay for anything with the Fed’s newly created money. The Federal Reserve Board of Governors, of which Powell is Chair Pro Tempore, is an agency of the US government. So the US won’t ever run out of money, but the dollar might run out of purchasing power – the trade-off that is now particularly ugly.
