The Great Debt Excess

“NY Fed President Williams says U.S. is not ‘anywhere near’ its limits to run up debt”.

Was it really a surprise that NY Fed President Williams said that the U.S. isn’t not anywhere its limit to run up debt?  According my Twitter feed not. Reactions on this differenced somewhere between laughing hard, sarcasm and ‘it doesn’t matter anymore’.

The FRED charts below shows the growth of public debt as percent of Gross Domestic Product. During the recent years it has grown over 100%, while a maximum manageable level is around 70% of Gross Domestic Product if I’m right. In de early 80’s Fed Volcker responded to growing inflation by raising rates multiple percents. Interest rates peaked over 15% on the 10 years Treasury T Note, an important overall benchmark. It was the time that the bond market bottomed. The % of of Total Public Debt was quite low, between 30 – 40% of Gross Domestic Product. 

Public debt as percent of Gross Domestic Product
10 Year Treasury Rates

Back to Williams. What he really said was that the debt bubble can grow even bigger by driving up its price and suppressing interests rates even more lower, perhaps even into negative territory. Frankly, that isn’t really surprising for someone who represents the global banking cartel. Banks create loans out of nothing. That’s their core business.  Is it any realistic to expect him to say “well, we’ve gone too far with creating debt, we have to turn it back and shrink this debt mountain”?  

Looking at the long term debt cycle,  it will be a matter of time that it turns. Meaning prices of US debt heading lower as interest rates go higher. The FRED chart below compares the Federal Funds Rate and the Federal Debt. It shows the huge divergence between the federal Finds rates and the amount of total public debt since the 1950’s. Every chart minded person will notice that such huge gap between these two doesn’t represent a sustainable trend. 

When interest rates will start to increase, it makes the costs of servicing debt only more expensive. In that case, can Williams still get away stating the U.S. isn’t anywhere near its limits to run up debt? 

In the early 80’s it was Volcker doing this political unpopular job when stagflation took a hit on the Dollar. Nowadays this will be a decision that has huge implication on the financial world, financial assets, as the stock market and the economy. The amount of debt is way bigger than it was in the early 80’s. 

Has the Fed the courage to face the music or will markets have a say on it, signaling ‘enough is enough’? So far Gold shows the way just as it did during the 1970’s stagflation.  The big question is, will the Fed (be forced) to raise rates or will markets forces do the job finally?

Lots still believe this game by the Fed has more room to run as long it can manage to support the US stock market going up. Remember that the Fed always walks behind the facts, it doesn’t predict and anticipate them accurately. The stock market is in a bear market that started during the March dive. A bear market rally like current one will not not hold imo. And if the US stock market isn’t no longer the place to invest, investors start to look for alternatives.

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