Is anyone paying attention? I don’t know, but the cost of carrying debt has been rising and it’s already showing measurable impacts despite the Fed Funds rate still being very low.
My concern of course is that the global debt construct will bring global growth to a screeching halt (see also The Debt Beneath).
As the 10 year is already piercing above the 2.6% area now I want to pay attention to the data coming in as the Fed is dot plotting more rate hikes to come:
After all the Fed has hiked 5 times off the bottom floor in the past 2 years:
Can we see any measurable impact? You bet we can.
Here are personal interest payments for consumers:
Mind you we are still near the lows of the previous cycle and already total interest payments are near record highs.
The driver of course is record consumer debt and credit card debt (see also macro charts). But despite rates still being historically low this rise in interest rates has an impact on the consumer.
Already we see this:
“The big four US retail banks sustained a near 20 per cent jump in losses from credit cards in 2017, raising doubts about the ability of consumers to fuel economic expansion. “People are using their cards to get from pay cheque to pay cheque,” said Charles Peabody, managing director at the Washington-based investment group Compass Point. “There’s an underlying deterioration in the ability of the consumer to keep up with their debt service burden.” Recently disclosed results showed Citigroup, JPMorgan Chase, Bank of America and Wells Fargo took a combined $12.5bn hit from soured card loans last year, about $2bn more than a year ago.”
I repeat: “There’s an underlying deterioration in the ability of the consumer to keep up with their debt service burden.”
That’s a problem given the Fed’s dot plot. Before you know it consumers will be handing over a good portion of their tax cuts to credit card companies. Winning.
Is the government carrying record debt immune to this? Nope.
Here’s the latest monthly Treasury statement:
Interest on debt alone was $32B for 1 month.
During the same month the year prior it was $25B:
That’s a 28% increase year over year. Perhaps the data is lumpy month to month, we’ll see confirmation in the next few months. But much of this US government debt has to be refinanced in the next few years, meaning it will be subject to much higher rates and the US needs to continue to add to its debt to keep itself financed..
Indeed the recent tax cuts only exacerbate an already existing debt sale schedule:
“Economists with Deutsche Bank expect the extra debt the Treasury must issue to fund President Donald Trump’s tax package and the amount of debt the Federal Reserve plans to redeem at maturity this year will bloat issuance to about $1tn in 2018. That’s up more than 50 per cent from a year earlier and, when coupled with a 30 per cent rise in the amount of corporate debt that’s due to mature, leaves questions of who the eventual buyer will be.“
A good question indeed.
That’s a lot of debt issuance:
Somebody has to buy it or the pain is real:
“If demand for US fixed income doesn’t double over the coming years then US long rates will move higher, credit spreads will widen, the dollar will fall, and stocks will probably go down as foreigners move out of depreciating US assets,” Torsten Sløk, an economist with the bank, said.”
No, we can all pretend rising rates don’t have an impact, we can also pretend deficits don’t matter, and we can also pretend money grows on trees.
But we can’t pretend interest payments aren’t rising. Because they are. Right now.
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Since debt levels outside the US are greater, and the US dollar is the reserve, the sovereign debt crisis must hit the periphery first and hardest. When sovereigns default, where does the capital flow? As the dollar must necessarily rise, what happens to the balance sheets of the foreign entities holding too much dollar-based debt?
The chart showing personal interest payments – are those constant dollars? If not then it might not be a bad idea to show the same chart using them.