The interest rate is controlled by the Fed, which is effectively a branch of government.
Also, inflation concerns (by reasonable people) only occur when the economy overheating. An overheating economy automatically reduces the government deficit via increased tax flows and reduced social security spending.
Treasury bills have a fixed-rate coupon. We pay more for older ones issued when interest rates were higher, but if we issue lots of them right now we'll still be paying 2.91% interest in 2043 when the bonds are retired. The idea is that when the economy expands further and interest rates rise, we don't borrow as much because a) revenues will be higher as well, which is good and b) it would be more expensive to borrow then, which is bad.
My mental model is that if inflation is 2%, the nominal interest rates are 2% higher than the real interest rate. How much does inflation affect the real interest rate?
A lot of the US debt is short-term; plus the US has a primary deficit.
The average interest rate over the past 50 years has been something like 5% [citation needed on my own number]. If we hit that, we will very quickly need to pay more money, and a lot of that old debt rolls over each year.
The US does not have a debt problem in 2013; as has been said, we can borrow at effectively zero. The US might very well have a big debt problem in 2018 or 2023.
My question was what's the relationship between nominal interest rates and real interest rates. Naively, it seems to me that we should care more about real interest rates than nominal interest rates (in which case why do we care about inflation, which just changes the measuring stick?).
