One of the worst things for an over-heated and extremely leveraged economy is rising interest rates. So, with the recent 2-2.25% interest rate, big trouble is on the horizon. Also, with higher interest rates, the U.S. Treasury will have to fork out even more money to service its debt. In just a little more than two years, the U.S. Fed Funds Rate jumped by nearly 2%.
This is indeed a big change for the Federal Reserve’s “economic stimulation policy” as it kept interest rates below 0.25% since January 2009. And with extremely low-interest rates, nearly zero, it allowed the United States to more than double domestic oil production.Unfortunately, this newly created oil supply has come at a huge cost. It has created another big mess which I call the U.S. Shale Ponzi Scheme.
The Federal Funds Rate is now 2-2.25%. As we can see in the chart below, it is the highest it has been in nearly a decade.
Furthermore, each time the Fed hiked interest rates, a recession (shown in the shaded areas) was the result. When the Fed increased the Funds Rate from 1% in May 2005 to over 5% by 2007, it assisted in the crashing of the mighty U.S. housing bubble and precipitated the investment banking meltdown in 2008.
Now, the Fed also plans to increase rates to 2.5% in December. So, this should start putting a great deal of pressure on the U.S. economy over the next few years. Furthermore, the debt service the U.S. Treasury has to pay also increases as rates rise. For example, the interest expense the U.S. Treasury paid to service the public debt for 2018 jumped to $523 billion, up from $458 billion last year. Thus, the interest expense increased by a whopping $65 billion (14%), in just one year:
Of course, another reason the interest expense is surging higher has to do with the ever-increasing public debt. In just a little more than a year, U.S. public debt has jumped by $1.8 trillion. According to my calculations, the $523 billion of interest expense for 2018 is approximately 2.4% based on the $21.6 trillion in total U.S. public debt.
