The Debt Reckoning Has Arrived: Total Debt Owed Now Approaches $60 Trillion While Fed Wrestles With Interest Rate Confidence Game.

Posted by mybudget360

Some people may be oblivious to the recent historical interest rate moves being experienced in the bond markets.  Many onWall Street probably assumed that the Fed had an unlimited ability to pull the wool over the eyes of the American public.  Yet the reaction with interest rates concludes an interesting chapter in American central banking policy.  The Fed can no longer preach for a lower interest rate.  After the brutal reaction, the Fed has softened its rhetoric on the “taper” of quantitative easing even though there is really no evidence showing the Fed is tapering anything at all.  The quick reversal in interest rates signifies a strong reaction by the market.  It is fascinating to see how much outside money is now flowing back into the US to purchase stocks, real estate, and other real tangible goods.  In other words, global investors are now demanding payment for all that cheap credit lent out.  The era of cheap debt is now reversing and the piper is demanding to be paid.

Total debt owed

The total US debt markets are now over 3 times our annual GDP:

We have largely become a nation built on debt.  There were a few recent headlines championing the growth in household sector debt ex-mortgage debt but the reporting failed to acknowledge that the bulk of debt growth has come at the hands of student loan debt.  And why would this be a problem?  The problem arises from the record level of student debt delinquencies:

In other words, one of the most problematic debt sectors is seeing the largest growth at a time when many are unable to pay it back.  Yet somehow, this passes as a good sign for the recovery.  Even though the $1 trillion in student debt is enormous, it is merely one part of the bigger debt market that now approaches close to $60 trillion.  The interest rate move is significant in the bond markets because a bond is merely a promise to pay a loan back with a fixed rate of interest and all initial principal.

What we are seeing however, is a reversal of cheap debt coming back to flood the markets at the expenses of a dwindling middle class.

Fed confidence game

The Fed is walking a fine line when it comes to the psychological confidence game.  After the massive reaction in the bond markets the Fed quickly softened its stance:

“(CSMonitor) Federal Reserve Board Chairman Bernanke spoke at an economic conference near Boston Wednesday, saying the Fed will continue to pour stimulus into the US economy — at least until unemployment and inflation improve.”

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