The U.S. Federal government has been running deficits in the hundreds of billion

Question

The U.S. Federal government has been running deficits in the hundreds of billions of dollars which means that the U.S. Treasury is issuing hundreds of billions of dollars in new Treasury securities. If this is all you consider, what are the consequences for interest rates, spending financed by private borrowing, the money supply, the bond supply and inflation from this action alone? While the U.S. has been running these massive deficits, what has been true about interest rates? How do you explain this contradiction in interest rate effects and what are the big concerns going forward?

Explanation / Answer

Answer Since the Federal government has been running deficits in the hundreds of billions of dollars due to this its treasury department is issuing billions of dollar securities, due to this

Interest rates will be high because when people or private players will invest in these securities, definitely they require higher return on these securities so interest rate will shoot up

Money supply in the market will reduce because the public money now invested in govt securities. Also inflation will be low because of less supply of money in the market. The bond supply will increase after issuing the securities in the market.

If this deficiet would subsist then interest rates will be sky high and it can lead to deflation in the future period and economy can run into recession.

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