Enjoyed the segments. Nice to see you getting into these programs.
Have to say I didn’t understand why a 115 bais point spread between 10 and 30 year treasuries means a 6% implied rate on 30 year treasuries…
[First attempt didn't take, sorry if this ends up a duplicate.] Somehow FB actually let me post on Ryan’s page – oops! It didn’t stay up long, and I didn’t think to grab a screen shot, damn it. Here’s what it said:
I was thinking about the debt service issue. As debt service is nothing other than another government expenditure, there are no operational impediments to meeting debt service at any level. Obviously, we’ve put in place voluntary restrictions such as a debt ceiling but that’s only politics. However, let’s assume potential GDP is $14 trillion and aggregate private sector demand ex debt service is $12 trillion. If debt service is $2.5 trillion, then the government must run a surplus in everything else or aggregate demand will far exceed potential GDP. The potential problem would be runaway inflation and the limited ability of the government to do much of anything.
In this situation, the government would have to stop issuing Treasury securities and instead pay some small rate on reserves at the Fed. In all likelihood, this would trigger significant selling of dollars….which would also be inflationary. Currently, the output gap is so large that debt service isn’t an issue. However, 10 years down the road of $1 trillion deficits, this could become a problem.
I’d love to hear your thoughts on this. Maybe (hopefully) I’m missing something.