[hydroreadsstuff]

Afaik the needed difference in interest payment from the fed comes from the treasury. So it’s indirectly connected to the budget. In theory though you can still raise more debt to pay the interest. But I’m not sure about the longterm consequences of this.

Having inflation above the interest rate helps decreasing the debt/gdp ratio.

[doubleunplussed]

Why can't they just pay the interest with newly-created money?

I mean, that might not be how things are set up right now, and it would make their position even more negative since newly-created cash is a liability on their balance sheet and they didn't get an asset for it. So maybe at the moment it's on the treasury to make up the difference. But I don't see a fundamental reason why that needs to be the case, it seems incidental to the current setup.

And yeah, even under the current system the treasury could sell bonds to fund the shortfall, and then the Fed could just buy those bonds (via the market) and keep them on their balance sheet, rolling over forever and so effectively loaning the money to the treasury at zero interest forever. So that's just the same thing but with extra steps.

[hydroreadsstuff]

The system is set up to avoid such shenanigans. If desired, the question is will they find a way to work around the rules. I agree with you, but then the trust in the system would be greatly damaged. They might as well have two different interest rates / not pay IOR.