For the current fiscal year, the CBO assumed that the average interest cost on debt held by the public would be only 2.9%. Short-term T-bill financing upon which the Treasury has become overly dependent is almost double that.
Together with the estimated $7.6 trillion of maturing debt to be rolled into new debt at higher bond yields this fiscal year, we are looking at a further $3 trillion of deficit to fund, totalling $10.6 trillion.
Debt funding costs will depend on the marginal collective view of foreigners.
In large measure created by debt funding problems, rising interest rates will make this situation even more difficult.
In the process of relying increasingly on short-term funding, the debt maturity profile shortens, so that the costs of rolling over maturing debt rapidly rises.
Interest rate arbitrageurs are even short of euros and yen, and their positions would be reversed out if interest rate differentials are expected to decline.
If, as seems increasingly likely, foreigners begin liquidating their overweight dollar holdings thereby driving the exchange rate lower in terms of purchasing power, both interest rates and inflation must rise.
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