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.
But, before I get into details of this article, I wanted to let my readers and followers know that the lack of articles this week was due to a freak storm that impacted our area. We had a mini-tornado or a micro-burst that touched down in our local area which caused a great deal of destruction, mostly to trees and bushes. In a little more than 10 minutes, upwards of 100 mile per hour winds uprooted, snapped and destroyed a large number of trees on our property.
Interestingly, there was only minor damage done to one home in the adjacent neighborhood. The homeowner’s wooden porch and garage tin roof were ripped off, and part of the roof is still hanging 30 feet up in one of our trees. So, I have been quite busy not only cleaning up the mess on my property, but also helping my neighbor. I will say, the good thing that came out of all this destruction is how our neighbors came out together to help out.
So, I apologize for the lack of articles this week. But, I will be posting several articles next week on the interesting changes taking place in the economy and financial system.
Okay, getting back to rising interest rates. 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.
As I have mentioned several times in previous articles, what happens when interest rates double to 5%, as they were in 2007? It means that the U.S. Treasury will have to pay $1.08 trillion just to service its debt. However, I don’t believe the Fed Funds Rate will get to 5% before the stock market cracks and the economy heads into another recession. Even if the Fed continues to raise rates, possibly to 3%, it will have to lower them once again when the overheated economy starts to cool down.
Unfortunately, the next U.S. recession (possibly depression) will destroy the U.S. Shale Energy Industry. This is undoubtedly bad news because without the additional 5.5 million barrels per day of U.S. shale oil this past decade; I don’t believe the U.S. economy could have been pulled out of the 2008-2009 recession. We need to realize it takes real physical energy to drive economies. While money printing and the addition of debt can prop up the economy, it can’t be done without the energy.
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Lots and lots of warning signs. I’m looking forward to hear what Economist John Williams from ShadowStats has to say about the current warning signs in the economy. He’s being interviewed by Greg Hunter tomorrow.
Ticking No Longer
The fuse reached its target back about May – June.
The RE sector is now falling flat, on multiple fronts and has picked up momentum.
The global politico/military economic situation, is increasingly spinning out of control.
All this, as attention has been diverted by the Kavanaugh dog and pony show.
Steve, glad to hear you came through somewhat intact. Stay safe. We need your voice.
I second that; glad you made it through the winds ok Steve
As for the economy, I have this distinct feeling that it’s falling apart at the seems beneath the surface. It scares me. Something wicked this way comes…
My raise at work couldn’t have been better timed, as I’ve renewed my efforts to prepare. More silver coming in, more food for my stores. It’s time to pinch pennies and not be wasteful.
I also have been lapping up mining stocks, hoping to be able to flip those for some land and hold on to my physical PM’s for as long as possible.
Best of luck to you all. Don’t listen to the heretics. Believes you are Noah, and the rain clouds are forming. These aren’t times to follow the crowd
Jason Burack of Wall Street for Mainstreet interviewed Vic Sperandeo a few weeks ago. A very interesting comment by Mr. Sperandeo was his explanation of how the FED was able to reduce its balance sheet and yet issue new Treasuries presumably to service the ever-increasing debt. Enter the “Gamboni”
Apparently, the rules have been “rewritten” which allows Commercial Banks to acquire FED Treasuries without any reserve requirements to purchase, the Treasuries being valued at mark to make believe, the Commercial Banks guaranteed 3% return. What a deal! What a way for the FED to flush its balance sheet! and for the money wheel to keep turning.
I assume from there, the Commercial Banks can turn around and pledge these Treasuries as collateral to buy new stock (keep the stock market inflated) AND make loans to corporations to allow them to continue to buy back shares of their own stock, and from there, the CEOs buying and selling and taking the money to the bank.
Also, these Commercial Banks stand to gain as they buy these stocks through their trading desk.
Any possibility of this being true? It really sounds like it is right up the FED’s dirty tricks alley.
OOOps. Sorry. forgot the link.
https://www.theepochtimes.com/the-rules-of-the-bond-game_2600435.html
Hi Steve,
You discussed a lot about Eroi regarding oil and gas. But have you ever serious looked
at uranium as the Eroi for uranium must be more then exellent. I am aware there is a long proces with mining uranium. In order uranium to be used as fuel in a nuclear plant there is a long and costly process/handling to be done. But the Eroi for uranium is just a class of its own.
Have a look and judge for yourself. The uranium reserves are massive globally.
https://en.wikipedia.org/wiki/Energy_density#Introduction_to_energy_density
http://www.uranium1.com/clean-energy/#climate_change
Thanks, Steve and glad to hear you’re ok!
Steve,
everything is about preparation if you want to survive twisters and crash you need solid structures and solid plan .
I’m just asking you people to look at the gold and silver dollar price for yourselves, that’s all. It’s very easy to do now, just go to http://www.goldprice.org. You can then adjust the graph timescale to look further back in time. From there, you can see silver is at the same level as 10 to 11 years ago, and gold 8-9 years.
Clearly, gold and silver are not increasing in dollar price to accurately reflect the dollar inflation. As such, they are not acting as inflation hedges, much less acting like they are in a bull market. They are, in fact, hardly doing anything at all.
Therefore, I conclude that you guys are wrong, and stacking is a waste of your life. I’m cured now, I’m never stacking the metals. Life is too short.
Dolph,
Have you looked as well since 1913 what the gold price has done? Being igonorance for the facts is very comfortable. Just keep your paper dollars with printed green inkt on it they are really the best investment, wish you all the luck keep stacking these benjamin,s great advice!
When I was born the Gold price was $38.50. Today Gold is around $1200 and the U.S. government has over $21 Trillion in debt. The U.S. carries an annual trade deficit of $500 Billion and increasing, and yet the U.S. is the healthiest horse in the glue factory. What does that say about the rest of the interconnected globe? Maybe you should should re-evaluate your perspective.
It’s the same old [defeatist/ignorant] meme from dolph.
From this point in time gold and silver have to go up in fiat price, even with COMEX, CFTC, LBMA, governments, and central banks complicit in actively suppressing the price in fiat.
The price of finding, legal/administrative/environmental, mining, and refining to .999, then making bars, rounds or coins is going up. Meanwhile fiat currencies saved are going down in purchasing power far faster than lying government inflation figures.
And what is a safe bet to invest fiat currency in that isn’t in a massive bubble…to where one could lose a substantial portion of their investment.
Reality is from this very moment forward. We are talking about what is a safe form of savings or investment from this moment forward. But if one wants to look at the past 10 years or so for guidance, G & S look better now to put fiat into than most stocks, bonds, or real estate.
First post here and wanted to show appreciation for Your energy thoughts Steve Thank You! When any area’s weather is exhibiting violence it simply means the weather weapons have not been Gifted with inexpensive easy to make Orgonite devices! Usually only takes 1 per tower that most mistakenly presume are primarily for Call phone communications ok? The millions of towers, all across the big wide world, that suddenly sprang up after 9-11, have a lot more uses with weathet manipulation being only one of them. Make or buy a bag of orgonite t/bs (towerbusters) and toss them out Your car window while driving by each tower in Your town and You wont have anymore violent weather. Thousands of Us have been doing this for nearing 2 decades already iow’s it works but You wont know for sure until You do it for YourSelf.
Whoa MEDS, please take them.
Come off of meds or go on them? Maybe both.
It’s actually true, its scientific terms are called: “Geoengineering, stratospheric aerosol injection, solar radiation mgmt, stratospheric aerosol Geoengineering”. It’s weather/climate warfare, weather/climate manipulation. Even the US Govt admits these programs have been ongoing for decades. There are also ionosphere heaters which are part of the US Govt’s H.A.A.R.P. program.
Go for it http://whitemagicway.com/orgone-devices.html
Yeah that has nothing to do with geoengineering.
It really is all about energy, or lack thereof. With sufficient energy entering the economy, there’s enough “extra” to support growing consumption, to support pay increases, to continue feeding the deformed global finance/credit machine — and the speculative casino economy keeps churning. But without enough energy, consumption goes down, jobs are lost, wages stay flat or go down while the cost of energy and therefore many other essentials increases — things start breaking down. This is where we appear to be right now. It seems likely that we are in the midst of energy shortages already and have been for a while, but those shortages have been obscured and papered over with propaganda, successfully keeping most people oblivious to this dire reality. For example, it is likely that there is a LOT more to the Trump trade wars than some seeming buffoon trying to deliver on his promises to bring industry/jobs back to America. More likely, it is a cover story for explaining declining trade and consumption — avoiding the fact that it is lack of energy that is the main driving force, something they will never admit in public. We simply don’t have enough energy to continue on with wasteful global trade while trying to keep the rest of what passes for the global economy propped up. Most likely, we’ll soon find out that we don’t have enough available energy to conduct a whole lot more of what used to be considered business as usual. Things are changing right in front of our faces, the pace of this long slow decline is quickening, becoming more noticeable day by day. I think it’s time for me to get a goat or two for my pasture too…
Congress is still trying to pass more tax cuts (excuse: to further stimulate the economy), yet where is all the extra revenue now? Business is paying much less tax and these part time jobs created- workers pay little or no tax.
It’s impossible now to raise even minimal needed tax increases on corporations in the future, politicians would argue(for their buddies) any raise would harm the economy and business (those sweet corporations buying back their stock with the tax breaks).
If anyone puts it past the government moving to confiscate precious metals, you better think again. Most likely the scenario could soon develop to protect the dollar from gold like in 1933. This US paper monopoly on controlling gold prices can’t last forever when now, too many currencies around the world are tanking. With gold leveling out to around $1200, creating a safe hedge against their dying paper money, physical buying in most countries could dramatically increase.
Silver does not want to close lower tomorrow. If it does the uptrend becomes a bearish flag which means it could go to 11 bucks or lower and I will once again be short.
Same for the S and P. If it closes lower tomorrow I will be short that as well.
Yesterday gold went up and silver went down which never used to happen. And oil does not give a hoot about gold and silver anymore.
Interesting times.
Looks like fiatskies going out the window by the billions as we speak. Will the prisoners of greed jump? Ooohh, phyz silver shortages would be a good laugh don’t you think? Wonder how much the cb’s will pump this time, together with lower rates; untaper. Playground for cb’s is getting smaller and smaller.
As Jörgen Randers once said in an economy unable to grow because of peak oil or other limits interest rates should end being 0%. Well, they could enb being negative but negative interest rates are not generally accepted. The Fed hasn’t understood this and in it’s effort to calm the bankers and other rentiers they may be pushing the US economy into fast degrowth.
Of course, if the energy crisis can’t be solved we will see in the long run the total disappearance of the banking sector. Are we going to see again old fashioned laws against usury ?