>Not once have I ever heard what the consequences of this debt are to the regular tax payer.
Inflation, and systemic fragility.
The second part is esoteric but extremely important. In financial systems, you often find that risk clusters in gray areas where models are incomplete or where the cost doesn't show up as a line item on a report. For example, increasing the bank leverage ratios to tamp down long term yields (some talk of this possibly happening that I've seen in the trading space), swaps the cost of higher interest rates for banking fragility. Risk cannot be erased, just transformed.
When it comes to debt, the Federal Reserve balance sheet spiked from 4 trillion to 8 trillion during 2020, which was in and of itself a result of earlier systemic fragility (bond leverage/basis trade collapse, which is essentially the link between the directly FED controlled ecosystem and the even more massive modern global dollar system). That balance sheet expansion seemingly had no "cost", due to interest rates being zero, but when looked at with a wider lens, the Fed essentially had massive amounts of convex interest rate risk on its books. When inflation did wake up (in large part due to the sharp fiscal infusion), their response function is to raise rates, but that functions as an immediate devaluation of their book which in part functions as a large wealth transfer to the private sector (which includes many things like mortgage holders, to the embedded inflation in long term options which the trading account I was managing got for essentially free). The net result was inflation that ran away, a borderline housing bubble where a generation is priced out, and of course a massive spike in inequality. With higher rates, Reverse Repo was also paying hundreds of billions in interest, directly fighting the inflation reducing effort.
The previous regime looked good on paper - yields were low, inflation was low, etc, but essentially what was happening was an overheating system that didn't fully factor in the costs of QE. Naturally, the costs are eventually realized. But it's insidious when these effects are, as I said, things like increasing wealth inequality that won't show up on a balance sheet report on WSJ. Risk clusters in gray areas.
So the situation now is that the treasury has shifted most of the issuance to the short end, Which means that there is a concentration of risk that starts to accelerate if inflation starts to tick up again. Because all of the T-bills get rolled every six months to two years. Before too long the debt is going to have to be termed back out to the long end, but at that point you're going to see some serious issues absorbing all of the issuance. That line raises the risk of a liquidity crisis and a breakdown of the repo market, which is a financial crisis. Alternatively, the debt can be once again stuffed in the central bank balance sheet, but it's unlikely that that regime is going to come back in full force because the costs of doing so are now extremely apparent and humans have recency bias. If the options become too constrained, the net result would be a Bank of Japan style situation, where a major currency devaluation is the only realistic scenario.
So as for the costs, it's not something that's ever going to be immediately seen, unless something's going wrong. You will probably see a mix of all of the above. Bank regulations loosened so they can take on more risk. Central Bank reversing balance sheet runoff. Some slow grinding currency devaluation. And a slew of creative financial repression (lower long term bond yield) initiatives.
Zooming way back out, it's just not an ideal or efficient way to run the system, to have these slow rolling crisis waves reverberating through time. Billions dollar pet startups levered against the QE regime was not efficient allocation of resources. Negative cost leverage for private equity is not ideal for an egalitarian society. Etc. Of course there are the more obvious examples, like sharp inflation shock risk, and budget constraints as interest payments rise, but my point is that the costs are there. All around you. You just don't see them.
The fragility point is a good one, but it's also misleading if you only look at one side of the equation. The other side is assets sloshing about the system -- like a large tanker without internal divisions, if there are a lot of assets sloshing about and the tanker gets into bad weather, the internal movement of assets can increasingly destabilize the whole thing.
That's one aspect of retirement systems that has always concerned me. Sure, it's neat to give people the control over retirement that comes with investing in an open market. But contrast this to public retirement systems where you pay in and the money is used to pay out retirement (of other people) immediately. Ultimately, both systems have to be sustained by a real economy that can provide the goods and services that folks require during retirement. But one of them puts a large amount of assets into the hands of unelected money managers, which is surely a potential source of instability.
Inflation, and systemic fragility.
The second part is esoteric but extremely important. In financial systems, you often find that risk clusters in gray areas where models are incomplete or where the cost doesn't show up as a line item on a report. For example, increasing the bank leverage ratios to tamp down long term yields (some talk of this possibly happening that I've seen in the trading space), swaps the cost of higher interest rates for banking fragility. Risk cannot be erased, just transformed.
When it comes to debt, the Federal Reserve balance sheet spiked from 4 trillion to 8 trillion during 2020, which was in and of itself a result of earlier systemic fragility (bond leverage/basis trade collapse, which is essentially the link between the directly FED controlled ecosystem and the even more massive modern global dollar system). That balance sheet expansion seemingly had no "cost", due to interest rates being zero, but when looked at with a wider lens, the Fed essentially had massive amounts of convex interest rate risk on its books. When inflation did wake up (in large part due to the sharp fiscal infusion), their response function is to raise rates, but that functions as an immediate devaluation of their book which in part functions as a large wealth transfer to the private sector (which includes many things like mortgage holders, to the embedded inflation in long term options which the trading account I was managing got for essentially free). The net result was inflation that ran away, a borderline housing bubble where a generation is priced out, and of course a massive spike in inequality. With higher rates, Reverse Repo was also paying hundreds of billions in interest, directly fighting the inflation reducing effort.
The previous regime looked good on paper - yields were low, inflation was low, etc, but essentially what was happening was an overheating system that didn't fully factor in the costs of QE. Naturally, the costs are eventually realized. But it's insidious when these effects are, as I said, things like increasing wealth inequality that won't show up on a balance sheet report on WSJ. Risk clusters in gray areas.
So the situation now is that the treasury has shifted most of the issuance to the short end, Which means that there is a concentration of risk that starts to accelerate if inflation starts to tick up again. Because all of the T-bills get rolled every six months to two years. Before too long the debt is going to have to be termed back out to the long end, but at that point you're going to see some serious issues absorbing all of the issuance. That line raises the risk of a liquidity crisis and a breakdown of the repo market, which is a financial crisis. Alternatively, the debt can be once again stuffed in the central bank balance sheet, but it's unlikely that that regime is going to come back in full force because the costs of doing so are now extremely apparent and humans have recency bias. If the options become too constrained, the net result would be a Bank of Japan style situation, where a major currency devaluation is the only realistic scenario.
So as for the costs, it's not something that's ever going to be immediately seen, unless something's going wrong. You will probably see a mix of all of the above. Bank regulations loosened so they can take on more risk. Central Bank reversing balance sheet runoff. Some slow grinding currency devaluation. And a slew of creative financial repression (lower long term bond yield) initiatives.
Zooming way back out, it's just not an ideal or efficient way to run the system, to have these slow rolling crisis waves reverberating through time. Billions dollar pet startups levered against the QE regime was not efficient allocation of resources. Negative cost leverage for private equity is not ideal for an egalitarian society. Etc. Of course there are the more obvious examples, like sharp inflation shock risk, and budget constraints as interest payments rise, but my point is that the costs are there. All around you. You just don't see them.