US Rates & Debt Ceiling – the world’s problem

All eyes are on the US this week for 2 reasons.  Firstly Wednesday night’s Fed (FOMC) meeting where the world will be hanging on every word to decipher when (if) they will begin to raise rates.  Secondly the US has now breached its debt ceiling (again) at over $18.1 trillion.  You may recall the Government shutdown last time this happened as Republicans and Democrats fight it out.  Let’s just pause and remind ourselves of what this debt looks like because the 2 events are inextricably linked.  Since the world left the fiscal discipline of a gold standard (gold backing the currency) you may notice a trend in debt accumulation in the graph below (note the scale is millions of millions of dollars – trillions), particularly since the GFC…

Arguably one of the bigger threats right now to the supposed US recovery is another shutdown.  The Bureau of Economic Analysis estimated that the last shutdown cut 0.3% from GDP of Q4 2013.  With recent downgrades to this quarter’s GDP at 1.2% that would be very material to say the least.  Secondly the Fed is stuck between having to ‘walk the talk’ of their ‘everything is better’ rhetoric by raising rates accordingly and the economic reality of every 1% rise costing between $150-175b in extra interest on all the debt not to mention the market disruption and even higher (then current 12 years high) USD.  Quite the conundrum… which is why we don’t see it happening for quite some considerable time and, if it all, some token amount for appearances.

This of course is not just the US’s problem it is the world’s problem as the startling chart below (courtesy of banking giant Societe General) shows.  How with that debt to GDP ratio do you service debt at higher rates?  Hence the heading for the chart says it all….