hi doma,
i take it you wish to set aside the conversation about the war bond on which it appears simple interest was paid annually.
the bondholder may decide to reinvest the interest in other instruments. so they would hope to collect a compounded return. but the principle of the bond itself and the accompanying interest diminishes with the value of money.
perhaps this misunderstanding is why your views about government indebtedness are what they are. And why the markets seem untroubled by US debt (hence the low interest rate). They understand that the US only pays simple interest on its multi-trillion debt.
so long as the economy can support the debt burden, there's little to worry about. at current rates of interest, the annual cost of US debt is supportable. You can tell that because the amount of debt is no longer increasing as a percentage of GDP. this means they are not issuing new debt to pay interest.
if inflation reappears, then the value of the principle and the interest will decrease relative to GDP.
the thing that would upset the apple cart is deflation.
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