Why U.S. Debt is MAD with an Interest Rate Problem

The U.S. and global debt system is a house of cards. Countries are lowering interest rates and pushing debt levels higher to stay competitive.

This is useful for near-term expansion and countering the recent self-induced recession… but it’s not sustainable. Some countries are even jumping into negative yield territory to keep the party going.

Toward the end of last year, close to $17 trillion in global debt had a negative yield. That number has bounced around… but as governments manipulate their economies further, that total might climb higher.

So far, the U.S. hasn’t breached negative yield territory. And if it does, I doubt that would be sustainable with the U.S. dollar being the world’s reserve currency.

Still, there are some major problems. And I’m about to show you a chart that reveals the real problem with U.S. debt. But first, it’d be useful to look at how a warfare concept compares to the global debt situation…

U.S. and Global Debt Problem Explained

Countries with nuclear weapons can obliterate other nations. So if one country launches a missile first, it could create a chain reaction. This could lead to Mutually Assured Destruction (MAD).

How does this compare to the global debt problem? If one country is borrowing from its future self to spur short-term growth and is manipulating its currency, other countries need to take similar action to stay competitive. Because ultimately, economic policy is more important than nukes. And if one leading country falters, it would be a domino effect in our globalized world.

Bad economic policy is often what leads to war. For example, World War 2 was a result of a worldwide economic depression that hit Germany the hardest.

Policy makers have learned from those past mistakes. Although, countries have become more connected and debt levels relative to economic growth are now my major concern.

As you can see below, total U.S. debt to GDP has climbed since the 1980s and is now above 100%…

U.S. Debt-to-GDP History

As 2020 data rolls in, debt-to-GDP will climb higher. The Fed has pushed down interest rates once again to counter short-term pressures. This creates more debt sloshing around our economy.

This next chart shows the Fed Funds rate. It’s the overnight lending rate between banks. The Fed controls it by open market operations and adjusting rates on its reserves…

U.S. interest rate problem shown with the Fed funds rate near zero

For most of the last decade, it’s hovered just above 0%. The Fed is now stuck and has already started using new tools. Tools that manipulate free markets even further.

It’s recently bought $1.3 billion in corporate bond ETFs. That’s small compared to its total holdings… but it’s a dangerous move that sets a bad precedent. If you want more insight as to why, drop a comment below.

Overall, U.S. debt is climbing. It’s climbing faster than economic output and governments are stepping in to keep the party going. They have to do this to stay competitive and keep the global house of cards propped up. Their actions keep helping in the short-term, but long-term, it might not be worth it.

When pulling back the curtains, there’s a bigger underlying economic problem. Trends in unemployment are a key problem. And I’ve shared some of that research recently.

Invest mindfully,

Brian Kehm

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