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Will the Fed Let the Debt Bomb Blow Up?

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Earlier this month, we reported that American household debt increased to a record $13 trillion in the last quarter of 2017. If you spread that out evenly, every man woman and child in America would owe about $40,000.  Add to that their portion of the US government debt – $63,000 – and every American, on average, is carrying a six-figure debt load. As U.S. Global Investors CEO Frank Holmes put it, the level of debt in America is a “head-spinning sum.”

It’s easy to look at these numbers and say, “Yeah, yeah, there is a lot of debt out there. But does it really matter? We’ve been talking about debt for years now and it hasn’t really made a difference.”

But the truth is, all of this debt is a ticking time bomb. The question is will the Fed let it blow?

As they say, context is everything. And the context right now is rising interest rates. Last week, a number of firms raised their interest rate target for the year to 3.25. That’s still pretty low. But as Peter Schiff pointed out in a recent podcast, that number becomes much more significant in a world drowning in debt.

I think what Wall Street is saying is, ‘Well, we can handle that. Three-and-a-quarter’s not that bad, right? It’s really not that high,’ and the truth of the matter is – it is. Even if rates were only going to go to three-and-a-quarter, when you’re talking about the magnitude of the debt that we have, that extra money is big. That’s going to be a big drain on the economy, to the extent that we have to pay higher interest to international creditors.”

This is going to impact both the government, with its debt approaching $21 trillion, and the average American dragging around $40k in debt. According to analysis by Goldman Sachs, the federal interest expense will rise to 2.3% of GDP by 2021, and could hit 3.5% by 2027.” And don’t forget that the biggest chunk of US GDP comes from consumption. People can’t consume as much when they are paying more every month to service their debt. This is going to impact economic growth. As we said in an aricle last week, debt is a cancer on economic growth.

But Peter thinks the situation is even more ominous because interest rates aren’t going to stop at 3.25.

No way! I mean, why would that happen? … In fact, given how much debt we have, and how much debt is going to be marketed, the massive increase in supply would argue for interest rates that are higher than what the historic average is. So, again 6%, 7% doesn’t seem out of the question at all.”

The markets don’t seem to have factored this in at all. Why not? Are they just oblivious? Or do they think the Federal Reserve will ride to the rescue and keep rates from spiking?

That’s what Peter thinks will ultimately happen.

I think the potential for five, six, seven percent rates is what will get the Fed back engaged – get them to reverse course and do quantitative easing four. If they don’t do that, then everything is going to collapse.”

So basically, the Fed is between a rock and a hard place, but the central bankers don’t seem to realize it yet. If they let rates go, the debt bomb is going to blow. The stock market bubble is going to burst. The economy is going to collapse. We’re in for a deep recession. But if they follow the path Peter thinks they will – drop rates and fire up the printing presses – that’s going to doom the dollar. We could even see hyperinflation.

Both of these scenarios are good for gold.

As we pointed out in an article earlier this month, inflation is good for gold. And if the Fed actually does let things go and the debt bomb blows up, that also bodes well for the yellow metal, as Frank Homes pointed out.

As for the monumental debt load, I can’t say when or whether it might burst. All I can say with certainty is that the bigger it gets, the greater the risk it presents. This, in turn, underscores the need for a reliable safe haven investment, which I believe gold is.”

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