What is Judgment Day?

It is like ancient times that the Feds, under Greenspan, somehow decided that US needed to follow a zero interest rate policy, a policy now known as the ZIRP.  It was 2008 when Bernanke gave birth to the term Quantitative Easing, QE. QE was followed by Operation Twist, and its sequels – QE2 and QE3.

The new buzzword is “normalization”.  Normalization is the reversal of the QE operations and the raising of interest rates to above zero.  Whether we agree or disagree is irrelevant.  The fact is that the BLS just declared the unemployment rate is at 5%, a level that should justify initiating the normalization process starting with the next FOMC meeting in December. In other words, judgment day is at hand.


judayBatten down the hatches, judgment day approacheth

Image credit: World Wrestling Entertainment (WWE)


The following two charts summarize the Fed’s policies nicely.  The first shows the Federal Funds rate. It dropped from over 5% in 2007 to zero today.  So we are making a big deal over a possible 25 basis points hike?  I will leave that question for later.


1-FF rate, linearEffective Federal Funds rate. It may be hiked from nothing to almost nothing soon, but what difference would it really make? – click to enlarge.


The second chart shows the Fed Balance Sheet, also starting in 2007.  It went from $875 billion in 2007 to $4.5 trillion today, an increase of $3.625 trillion.


2-Fed assetsTotal assets held by the Federal reserve. This unprecedented intervention has delivered “the weakest economic recovery of the entire post-WW2 era”. This result should be no surprise to anyone, except perhaps the monetary mandarins themselves – click to enlarge.


Looking at the two charts above, they beg the question:  How do you normalize the extreme policies of the last 8 years?  If normal means a return to a 5% federal funds rate and reducing the Fed’s balance sheet back to under $1 trillion, we have a hell of a long way to go.

The next chart shows developments on the fiscal side, i.e., what happened to our National Debt during the same time frame.  Over the past eight years, public debt has doubled from under $9 trillion to over $18 trillion today.


3-Federal DebtThe explosive rise in federal debt – not to worry though, after all, “we owe it to ourselves”. Right? – click to enlarge.


The Problem of Debt Service Costs

Now lets get back to that potential 1/4% increase in the federal funds rate.  If it is indeed the decision of the FOMC in December to hike, can we assume that treasuries of all maturities could also move up by 1/4%?  In that case, the cost of financing our national debt would increase by $18 trillion X 1/4% or $45 billion.  What if monetary policymakers continue to raise rates to a slightly more meaningful level of 1%?  Under the above assumption, the cost of financing would increase to an extra $180 billion per annum.

How much is $180 billion?  Here is a recent non-news item that did not attract much attention, but it really serves to illustrate the significance of this increase in debt servicing cost.


“House votes to keep highway spending level, ignores warnings”

Despite years of warnings that the nation’s roads, bridges and transit systems are falling apart and will bring nightmarish congestion, the Houseon Thursday passed a six-year transportation bill that maintains the spending status quo. The bill, approved on a bipartisan vote of 363-64, authorizes $325 billion in spending through the 2021 federal budget year. But it provides money for only the first three years because lawmakers couldn’t agree on a way to pay for it all. The measure would continue current rates of spending, adjusted for inflation.


pot-holes.780Hello, road. Ye shall remain pot-holed (incidentally, a favorite whine of statists is “but who would build the roads if we had no government?”)

Photo via kxly.com


Investment in infrastructure is one of the easiest ways to create jobs, jobs that are not only high paying but difficult to outsource [1].  Here, our politicians are having trouble finding $325 billion over six years, or just $54 billion per year, to fund this bill.  A one percent increase in debt service costs ($180 billion/yr.) would wipe out funding for this bill completely and still leave taxpayers with an additional $126 billion deficit, to be added to the burden of servicing the $9 trillion deficit that has been built up since 2007 and the $9 trillion since the beginning of time and the >$500 billion annual budget deficit and the unknown amount of unfunded liabilities….

And what about all the other nations and entities that are carrying heavy debt?  China, Japan, EU member nations, junk bond-funded companies, consumers and on and on. In other words, central bankers with their monetary policies at these insane levels, have rendered fiscal policies powerless in comparison.  In fact, why bother with any fiscal policies, taxes, aand a budget at all?  Just spend whatever each government wants to spend and let the central banks finance it.

How about the real estate market?  Would a 1% increase in the average 30 mortgage rate kill the market?  I think it may bring the market to an abrupt stop.



In conclusion, the hole that the Feds have dug is so deep that it is questionable if the economy can survive the discontinuation of constant accommodation.  Any form of rate increase, even if it is just a quarter percent hike of a seemingly meaningless federal funds rate is a signal that the global economy may have to rely on its own merits.

It will not be painless for an addict who has been on drugs for 14 years (starting with Greenspan after 9-11) to go cold turkey.  Personally, I think rates should go up and some thought should be given to a safety net, in the event all hell breaks loose.  Then again, no one asked me for my opinion.




[1] As our regular readers are probably aware, we actually disagree with Ramsey on the economic merits of government-funded infrastructure spending. At most we can bring ourselves to make a “lesser evil” argument when comparing it with certain other fiscal spending priorities. As our regular readers are no doubt also aware, we are not interfering when our writers are voicing dissenting opinions, although we may occasionally comment. We trust in our readers’ ability to make up their own mind.


Charts by St. Louis Fed


Image captions by PT




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2 Responses to “Is Judgment Day At Hand?”

  • therooster:

    I see the ultimate judgement taking place in the market by way of the grass roots monetization of market gold. Most don’t yet realize it because of the market process (in the grass) but we can each use gold bullion as a market oriented debt-free currency by way of digitized mass and where the real mass of our our individual gold is held by Brinks (since 1859). The system is 100% backed , gram for gram.

    Say what you might about coping mechanisms but underlying debt is causal to the present day problems of poor liquidity and high debt levels.

    Bullion in circulation supports much needed “economic grease” while allowing existing debt to be purged and retired. Market osmosis plays a hand in the formation of a liquidity yin-yang.

    We need some yang with the existing yin within the TOTAL liquidity model. The problem is not debt in so much as too much debt. Let’s work toward balance.

    Just add debt-free assets and stir ….. gently

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