The Other Shoe – the NY Times points out that the current policy of low interest rates being created by the Fed flooding the world with free money is going to come to a really unpleasant end.
Because the US Treasury is able to borrow so much money for almost nothing, the interest cost to fund the government debt is quite low this year… but as soon as the Fed turns off the spigot of free money and Treasury debt reflects the real costs of the risks of investing in dollars, the cost to fund the debt will skyrocket.
But that’s not the half of it – more and more private debt is being tied to the LIBOR rate (London Interbank Overnight Rate). If that goes up only a percent or two, many companies that are heavily in debt (radio stations!), will immediately be crushed by the debt as their leverage ratios fall through the basement. Many companies have interest rate swaps in place to protect against that, but not all – and even those that do are dependent on the bank that sold them the swap not failing (think AIG)
