How to Think About the Deficit, the National Debt, and Interest Rates

1. The Long-Term Debt and Capital Markets Cycle: At no point in our lifetimes have interest rates been so low or negative on so much debt as they are as of this writing. The value of money and debt assets is being called into question by the supply-and-demand picture for them. In 2021, more than $16 trillion of debt was at negative interest rates and

We are now in a situation that is the opposite of the 1970s. Then there was a capital shortage. Now there is a capital surplus. Interest rates are historically low not because the central bank’s policies make it so. They contribute to it. But the fundamental problem is that there is a tremendous pool of money available for investment and a contract

Central banks are generally trying to spur economic growth and investment and to increase consumption, so they tend to increase the money supply and lower the interest rate, resulting in a larger quantity of loanable funds than savings. At these artificially low interest rates, businesses take on more debt to start projects than savers put aside to

For reasons difficult to understand, when the creditworthiness of a country is evaluated, only one year’s revenue (GDP) is measured against total debt. It is as if the total of an individual’s debt, from home mortgage, car loans, and student debt, were measured against one year’s income. Obviously, that would be irrational.