Corporate bond sales are at their lowest levels in a decade. On one level, that is a good thing: corporations are doing what individuals are doing–and government is not doing–and relying less on debt and more on equity for their operations.

Still, that does not bode well for an economy that depends on debt for its very existence.

As I–and others–have pointed out, debt is becoming more expensive. It does not matter that the Fed keeps rates at zero; you could set the Fed Funds Target Rate at -50%, and that hardly guarantees that banks will lend. This is because banks are only intermediaries between investors and borrowers.

The only reason you or I can borrow money at a bank, is because investors are laying down the bucks. Those investors are individuals, pensions, brokerage houses, hedge funds, even counties, states, and countries.

When/if investors start demanding higher rates and lower prices for the bonds, that will cause borrowers to have to pay more for their money. If a mortgage rate for a 30-year fixed is 4.8%, a spike in interest rates can easily cause that mortgage rate to double. (Some folks–who are old enough to remember–can recall when mortgage rates approached 20% in the early 1980s.)

If interest rates approached such levels–which would require a spike of about 15%, or 1500 basis points–it would be nothing short of catastrophic. Banks have entire departments–called Asset and Liability Management (ALM) teams–that spend their entire time developing mathematical models for different interest rate scenarios. Most banks will develop ALM policies that hedge against interest rate spikes of 400, perhaps as much as 500, basis points. Very few–if any–are prepared for a spike higher than that.

This is because, as interest rates spike that high, the cost of hedging against interest rate risk also rises.

What does that mean in English?

(1) If you make $70,000 per year–and have a mortgage of $150,000 at 6%, with 20 years remaining, and no credit card debt–you are okay as long as you can keep making that $70,000 per year. (Your monthly payment is just south of $900 per month, not including taxes and insurance.)

(2) Let’s say, however, that due to economic stresses, interest rates double–making the borrowing costs for your employer more expensive. This will cause massive layoffs in both public and private sectors.

(3) Let’s say that, due to these factors, you are able to find another job, but your best offer is, say, $40,000. You are now making 57% of what you were making before, but your debt load has not changed. That $900 per month is now almost 30% of your gross income. That’s before insurance. That’s before property taxes. That’s not including ordinary expenses. That assumes nothing about whether you are married and/or have children. That assumes nothing regarding health insurance.

With lower income and no reduction in terms of debt, it’s harder to save money. If you must sell the house, higher interest rates will cause the your selling price to fall. If you are upside down–owing more than the home is worth–you may be forced into a “short sale”, which–if you cannot cover the difference out of pocket–will burn your credit badly. If you relocate and seek to purchase a new house, your rates will be high, as will be the required down payment.

On a mass scale, that means (a) less borrowing, (b) less economic activity due to higher borrowing costs, (c) more layoffs, as businesses seek to stay afloat, (d) more mortgaged homes in foreclosure/short sale situations, (e) tighter lending practices, and (f) more pressure on government to cut spending.

That least part–(f)–is what Denninger and others are warning about. I call it the “Top Gun” dilemma: government has written too many checks that the body of taxpayers cannot even come close to cashing.

If you are I do that with credit cards, eventually the creditors will come knocking. At that point, we must either find a way to pay up, or declare bankruptcy and face the music, but we will not be able to continue spending on credit.

This is because you can only spend on credit, if others are willing to lend to you. Once they decide that the gig is up, your reckoning draweth nigh.

When will investors in Treasurys make this decision? I don’t know. But if I were a betting man, I’d wager that it will happen within 5 years, during which time we will see wild spikes and crashes in the stock markets.

As for the political ramifications, that is anyone’s guess. The scenarios can range from outright fascism to secessionist libertarianism and some combination of both.

Well…what I meant was “Where’s the RECOVERY???” It ain’t showing up here.

Meanwhile, Denninger has this fascinating video. So glad I’m not in the stock market.

Exhibit A: Karl Denninger:

All we’ve done is pulled forward future demand with more and more debt, and having reached the endpoint of this game where rates start to ramp precipitously (and having seen it happen in both Iceland and Greece) we can no longer play “a dollop of debt and a smile” with our own fiscal profligacy.

Obama and the rest of the merry band of clowns in Washington DC believe that if they can just prop up the stock market “consumer confidence” will return and people will “feel rich.” But feeling wealthy and being wealthy are two different things. You may feel wealthy if you have a nice house, a nice car and a nice boat but you aren’t in fact wealthy unless you have all of those things, plus enough capital to live off for the rest of your life, without any responsibility to pay anyone else on a continual compound forward basis – that is, unless you are without debt.

If we deal with the facts the stock market will decline precipitously, as profits are very sensitive to revenues, which will decline as production comes in line with actual final private demand. Standards of living will decline too – significantly so. The 3,000 square foot house for the “middle class” and the idea that one can consume $1 million or more of health care without the ability to pay for it will both disappear.

If we don’t deal with the facts then the stock market will crash, and the austerity we will face will be far worse. Instead of housing prices reflecting 2-3x annual incomes and the average family of four living in a 1,500 square foot house they will be lucky to live under an overpass. Half the S&P 500 will be rendered bankrupt by ever-increasing demands for more taxation, which they will try to pass on to consumers – who have no money. Medical care will be available – with a one year waiting list for critical procedures, rationing by the most-obvious method – you’ll die before your turn comes up. In the extreme case there could even be a breakdown of critical transportation and food infrastructure in the United States.

I want to be bullish on the future of the nation, but until and unless we get the spending under control, which means telling people what the truth is – not necessarily what they want to hear, along with taking the medicine we have avoided for the last two decades – it simply isn’t in the cards.

Exhibit B: The Telegraph (HT: Vox Day):

The M3 figures – which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance – began shrinking last summer. The pace has since quickened.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever.

“It’s frightening,” said Professor Tim Congdon from International Monetary Research. “The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly,” he said.

The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015.

Right now, the stock market is celebrating a rebound session after the rout that has been the standard for this week. There are no safe investments, except high-speed lead delivery systems and lots of said product. Professor Hale mentioned the mattress yesterday, and that might be much safer than anything that the TV pimps have to offer.

When one of the top dogs does this, it’s time to take notice.

May 27 (Bloomberg) — Dan Fuss, whose Loomis Sayles Bond Fund beat 95 percent of competitors the past year, said he sold all of his Treasury holdings because of prospects interest rates will rise as the U.S. borrows unprecedented amounts.

“The fundamentals are awful,” Fuss said in a telephone interview yesterday from Boston. “The incremental borrower of funds in the U.S. capital markets is rapidly becoming the U.S. Treasury. Do you really want to buy the debt of the biggest issuer?”

Fuss said he doesn’t own Treasuries in any of the investments he is directly involved with after selling the last of them this week. Loomis Sayles cut the securities to the lowest possible amount in funds with liquidity requirements or a minimum mandated level of U.S. government debt, he said.

His comments echo those of Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. and warned in his investment outlook for June that the U.S. is in a “debt super cycle.” Moody’s Investors Service said this week the U.S.’s top bond rating will come under pressure unless the government takes steps to reduce projected record budget deficits.

No one can say that the warnings weren’t there.

to observe this?

I’ll put it to you straight:

1. I live in a relatively stable area: job losses have not been severe, although the amount of new hiring has not been good.

2. I live in a very middle-class area: most of the homes in my development, and the developments around mine, are under $200,000. Most are $150,000 or less.

3. In my development alone, there are at least 5 vacant lots that have not been sold, and therefore no homes have been built.

4. In the 1.5-mile route that my wife and I walk most days, there are at least 5 abandoned houses. Aside from those, a large number of them–some listed within the last two weeks–are for sale. Some of them have been for sale for a couple years, whereas some are recent listings.

5. At least one of the recent listings has already cut their asking price by $5,000.

6. While there were several houses that “moved” in March and April, that was due to the tax credit that expired at the end of April. And those were for existing homes, not new development.

7. I have not seen any of those homes–that did not “move” in April–sell this month. But I HAVE noticed one new abandonment.

This is not the sign of economic recovery. When homes aren’t moving even within a middle-class development in a relatively stable area, that’s not looking good.

I have a co-worker (Sierra) who sold a lot of homes on the side during the real estate boom. Her real estate license is currently in escrow status because she cannot make money with it right now. She asked me if I thought there was a real economic recovery.

I told her: “If there was a recovery, you’d be making money selling houses right now!”

The folks at Calculated Risk have noted that housing typically leads when there is a recovery. Trouble is, right now some of that “housing lead” is in fact skewed because of government subsidies and tax credits that have artificially propped up the housing market.

In fact, the Austrian Schoolers are batting a thousand right now.

Our country–collectively–is finding out what happens when you lose your job and then try to live on credit cards. While this works if you are able to get a nice job and then pay down the debts, it does not work if you cannot get a job that is sufficient to cover those debts. Eventually, the creditors start cutting off the credit and/or demanding a higher rate for new credit.

In Europe, they are toast. If a little country like Greece can cause the whole EU to go TU, then no amount of “emergency credits” or “bailouts” will save that ailing horse.

The dollar Libor–the London InterBank Offered Rate–is spiking, and that is quite ominous. The Libor is one of the benchmarks that drives mortgage rates, credit card rates, and a whole host of financial loan products. When the Libor goes up, that means your borrowing costs–and everyone else’s–is almost certainly heading upward.

Creditors are getting sick and tired of lending, now that they are starting to see the likelihood that they will not get a return OF their money let alone a return ON their money.