- Martinis are like debt…
- The Keynesian multiplier has taken up division…
- Kiyosaki plug (not sure what you have in mind, Chris).
Dear Reader,
“One martini is alright,” counseled the late scribbler James Thurber.
“Two is too many,” he continued… “and three is not enough.”
As with the martini, so with debt.
One round of debt may be alright. Two is too many. And three is not enough.
Assume an economy in doldrums. Debt appears to offer a way out.
The initial dose brightens the economic spirits, livens the pace of commerce, sets idle industry awhir.
The customer yields rapidly to debt’s liquidy charms… as a man may yield to the womanly charms of the seductress.
He is hot for more. And so he orders a second round of debt.
The first round — after all — set things swinging.
He concludes the second round must therefore dazzle.
Two Is Too Many
Yet this second dose of debt dizzies the senses… and fogs the judgment.
It is one round too many.
Under false economic stimulation, projects are undertaken that would not otherwise be undertaken.
Popular industries are targets of overinvestment. Lovely bubbles take shape.
A spree of debt-fueled consumption is soon underway.
Yet a cardinal fact soon emerges…
This business is unsustainable in the absence of additional debt.
The preceding boom will collapse in a heap without additional debt to keep the show going.
Two rounds of debt prove too many — and three is not enough.
More, More, More
Thus the barman is instructed to mix the third libation.
Yes, it keeps the night going. Yet this dose lacks the stimulating effects of the second dose, much less the first dose.
That is, the third dose is not enough.
Only a fourth round of debt — an even stiffer round — can work the intoxicating effect.
Down the gullet it goes. It too proves inadequate to needs.
Thus a fifth, stiffer round is required to sustain the previous four.
And so a fifth, stiffer round it is.
By now the poor fellow is 100% out of his wits, all senses deranged.
Yet he demands more.
Get Out of Here!
Eventually the barman will serve him no longer. He is handed a bar tab — and what a bar tab!
The spendthrift’s credit card is declined.
The gorilla manning the door proceeds to haul him outdoors… and heave him upon the pavement.
He is a man undone.
If only he had declined that second martini.
Thus economist Daniel Lacalle informs us that:
- The United States had a $7.59 trillion nominal GDP increase between 2021 and 2024 compared to a rise of $8.47 trillion in government debt. This marks the worst GDP growth adjusted for government debt accumulation since the 1930s…
- US government spending financed by increasing federal debt accounted for about 22% to 25% of the total US GDP growth over 2021–2024. This extraordinary increase in government spending… led to record-high government debt and was the leading cause of money supply growth and, with it, the inflation burst that Americans are suffering today…
- Excessive government spending… led to an $8.47 trillion increase in debt and an unsustainable path to financial ruin if policies remained the same.
The nation’s pre-financial crisis debt ran to roughly $9.5 trillion.
Today the nation’s debt scales $36.5 trillion.
Is the United States four times wealthier?
It is perhaps — perhaps — 1.5 times wealthier.
The Keynesian “Multiplier” Has Taken up Division
One dollar of debt simply does not carry the load it once did.
Over 50 years ago, $1 of debt yielded perhaps $4 of economic growth — real or otherwise.
No longer.
The Keynesian “multiplier” — the promised miracle of water into wine — has taken up division.
And the miracle of water into wine yields vinegar.
It has been proven the false magic of a false prophet.
I refer of course to Lord Keynes himself.
The thing lives on primarily in the economics departments of ivied institutions and castles high in the sky.
The lesson, visible to eyes able and willing to see:
Debt-based consumption is a dreadful addiction.
It ultimately reduces the blood to sludge and the liver to rubble.
It steals from the future to satisfy today.
It brings tomorrow’s consumption forward to today, that is to say… and leaves the future empty.
The Perils of Profligacy
Economics commentator Charles Hugh Smith:
- Debt has one primary dynamic: Borrowing money to consume something in the present brings forward consumption and income…
- If we choose to consume now, we have less income to save for future consumption or investments. If we sacrifice consumption today, we have more money in the future for consumption or investing…
- Those who brought their consumption forward can no longer add to present consumption, as their future income is already spoken for.
Meantime, economists Carmen Reinhart and Kenneth Rogoff have demonstrated that annual economic growth slackens 2% per year when a nation’s debt-to-GDP scales 60%.
When it attains 90%, growth is “roughly cut in half.”
What is America’s current debt-to-GDP ratio?
The answer is 124%.
The Grim Realities of Negative Compounding Interest
Meantime, the Congressional Budget Office projects economic growth will gutter along at an average 1.8% annual rate the following decade.
That 1.8% stands in contrast to the 3% average rate common before the great gale of 2008 blew on through.
One percentage point and change may not appear handsome — and one year to the next it is not.
Yet multiply the business by five years, 10 years, 20 years… and you acquire a grim lesson in the realities of negative compounding interest.
I suspect Nemesis will come calling one day. I further suspect she will exact her full payment.
When precisely — or even imprecisely — I do not know.
Yet one debt martini was alright. Two was too many.
Alas, three was not enough.
Neither will the 57th.
The ultimate hangover will be a migraine for the ages.
Regards,
Brian Maher
for Freedom Financial News
