How to prepare your family to survive and thrive in todays uncertain world

Will The Debt Bomb Be The Big Trigger?

Yesterday we talked about the players and the reason why the math dictates massive economic impact.

I alluded to a potential major triggering event … the debt bomb.

Let’s discuss it today.

Background

We all understand debt.  First, we spend more money than we have.

In order for people to loan us that money, we have to pay them interest.  We agree with the lender what that rate will be.

Pretty straight forward.

The Federal Situation

We all know that the Federal Government is borrowing money every day.  Last Fiscal Year (2012) they spent about $730 Billion more than they took in.

In other words, they borrowed it.  They’ve been borrowing money for years and years because they’ve been spending more than they take in.

Overall, they’ve now racked up $15.8 Trillion in debt, as of FY2012.

The Federal Government is paying $450 Billion a year in interest, and that number goes up every day because they’re incurring more debt.  Honestly, the clowns are spending money like drunken sailors.

The Bomb

The bomb has been fused by record low interest rates, coupled with the priorities of the Fed who is currently buying most of the national debt.

Our current interest rate is about 2.8%.  Way lower than we usually pay.

According to the Federal Government’s own data, the average rate for the National debt is about 6%.  So double where it is now.  The rate actually hit 14% in the early ’80s.

So we have all this debt that we’re paying 2.8% on.  And we know that these rates aren’t going to go down much farther.

Logic dictates that the rates will go up.  Chances are we’ll be back to 6% at some point.  Historical data shows this, and leaves it wide open to roll even higher.

Now if the Fed was smart, they’d lock in rates with 30 year bonds.  After all, these rates are gonna go up eventually, right?

I’m willing to bet that most of you who own your homes and were able to refinance over the last couple years have done so.  Why did you do that?

You did it to lock in these historically low mortgage rates.  You’re being a smart borrower.

The Fed isn’t doing that.  Instead of locking in low rates with 30 year bonds, the lions share of the bonds they purchase are 30 day bonds.

Why, you ask?

Simple.  Every time they roll over that bond, the banks profit.  So they’re pushing more and more money into the banking system every time they roll over those bonds.  Instead of taking the long view, they’re pumping up the short term numbers to inflate public perception.

They’re kicking the can.

Since these rates aren’t locked in, when interest rates go back up to their normal historical levels, which they will eventually, it will double the interest payments that we owe.

Double.

What that does is immediately increase the amount of money that the Federal Government borrows.  Revenue won’t increase, and we know that spending won’t decrease, so the borrowing goes up correspondingly.

And just like a snowball going down hill, that borrowing gets bigger and bigger every month.

Market dynamics say that at some point rates will continue to increase in order to lure in new buyers for those bonds.  And that means that interest payments go up accordingly.

It doesn’t take a rocket scientist to see that this is a vicious circle that can’t end well.

Things may blow up before that, or they may not.  But disaster is inevitable.  The math mandates it.

Related Posts Plugin for WordPress, Blogger...

One Response to Will The Debt Bomb Be The Big Trigger?

  1. I’m really enjoying this series on economics. Thanks for laying out so clearly. There’s a lot to get your head around here. Can you expand on what you mean when you say that “disaster is inevitable?” What does this disaster look like?

    I think many people picture this scenario as something that would happen overnight but if I’m correct, what would actually happen is that things would steadily get worse. Interest rates and commodity prices will climb, businesses and government offices will close, the jobless rate will increase and services will disappear. But all of this will happen over a period of years, not days. Is that right?