As the federal reserve increases rates and engages in QT (directly removing money from the economy by selling bonds it bought off the open market during QE), the interest rates for government debt rises. This is a huge problem because the US and other governments around the world have been relying on massive government deficits for decades now, and could afford it because interest rates were being driven down by central bank policy. As the cost of that debt rises, it's just like the adjustable rate mortgages in the 2008 great financial crisis -- suddenly affordable payments become impossible to pay.
And what happens after that? Well, they might try issuing more and more debt for a while, but eventually you have a no-bid situation -- literally nobody else on earth wants to buy a government bond. It has happened in the past for countries, so it's not unprecedented. At that point, there's exactly one choice: Raise taxes, and eliminate government programs en masse. At that point it stops being "But this is such a good thing to do for people" and the reality starts being "There's literally no money, we just can't do this thing".
Of course, some people would just go "Well, just go back to QE! Problem solved!" -- and that would work, but the cost would be much higher inflation that we're seeing even now. Inflation now hurts, but if we don't get it under control, it will start having systemic effects. I've got every denomination of old zimbabwean currency from 1 dollar to 100 Trillion dollars hanging on my wall as a warning to what can happen. Incidentally, hyperinflation was the environment under which Adolf Hitler rose to power, which is another example of why we might not want to go there.
The UK is experiencing a taste of this right now, and they're schizophrenically raising interest rates and engaging in QE to limit the costs of their bonds which isn't really going to help. They were among the first, but they won't be the last.
And what happens after that? Well, they might try issuing more and more debt for a while, but eventually you have a no-bid situation -- literally nobody else on earth wants to buy a government bond. It has happened in the past for countries, so it's not unprecedented. At that point, there's exactly one choice: Raise taxes, and eliminate government programs en masse. At that point it stops being "But this is such a good thing to do for people" and the reality starts being "There's literally no money, we just can't do this thing".
Of course, some people would just go "Well, just go back to QE! Problem solved!" -- and that would work, but the cost would be much higher inflation that we're seeing even now. Inflation now hurts, but if we don't get it under control, it will start having systemic effects. I've got every denomination of old zimbabwean currency from 1 dollar to 100 Trillion dollars hanging on my wall as a warning to what can happen. Incidentally, hyperinflation was the environment under which Adolf Hitler rose to power, which is another example of why we might not want to go there.
The UK is experiencing a taste of this right now, and they're schizophrenically raising interest rates and engaging in QE to limit the costs of their bonds which isn't really going to help. They were among the first, but they won't be the last.
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