- “Most folks under 50 years old have no idea what’s coming next”…
- The end of “luxurious languor”…
- The PASSIVE stream of income that could absolutely MAKE your retirement…
Dear Reader,
Money man Jeffrey Clark:
“Most folks under 50 years old have no idea what’s coming next.”
Your correspondent exceeds 50 years of age. Thus I have — or should have — an idea of what is coming next.
Yet what is coming next… at least in this fellow’s telling?
I refer you to the following chart. It is a chart of the 30-year United States Treasury bond, stretching to the late 1970s.
Source: @StockCharts.com, Investor Place
The 40-Year Trend Has Reversed
Observe the 40-year decline of the interest rate, 1982-2020.
Then observe the great inflection of late 2020-2021… and the subsequent trampolining of the interest rate.
What then is coming next… that only those of riper years have experienced?
The answer — again, in Mr. Clark’s telling — is a cycle of elevated long-term interest rates:
- The 30-year Treasury yield [has broken] out above a 40-year declining resistance line.
- Interest rates entered a new, long term bull market… Rates are… 1,100% higher than they were at the bottom in 2020.
- In other words, the cost of borrowing money is 11 times greater today than it was five years ago.
11 times greater! And so?
The Days of Wine and Roses Are Over
Mr. Clark:
- Most folks, most companies, and most governments manage their debt by taking out new loans to pay off older debt as it matures. And, for the past 40 years we’ve been able to do this at perpetually lower interest rates. This allowed us to borrow even more money without incurring larger debt payments.
- People could buy bigger homes. Companies could pay premium prices to buy out competitors or buy back their own shares. Governments could spend money recklessly without feeling the pinch of fiscal budget restraints.
- There were no consequences to borrowing money. Deficits didn’t matter.
And now?
- With long-term interest rates recently hitting the highest level in 20 years, it costs more to borrow money. Any maturing debt must be refinanced at higher rates.
What’s Different This Time?
Next we direct our attention to that notorious wastrel Uncle Samuel… and his dismal finances:
- The U.S. government — with $9 trillion of its $36 trillion national debt due to mature in 2025 – for lack of a better word… is screwed. All of that debt will be refinanced at higher interest rates…
- “Deficits don’t matter,” the younger folks shout at us. “The national debt has grown from less than $1 trillion in 1982 to almost $37 trillion today, and nothing bad has happened.”
- They ask, “What’s different this time?”
What is different this time, Mr. Clark?
Take another look at the chart above. This time, you’ll see the difference…
And it could hit like a freight train.
I have taken another look at the chart above. I do see the difference.
And what precisely — as I stand in my tunnel — is that distant light barreling towards me?
“Luxurious Languor”
18th-century philosopher David Hume coined a delicious expression — “luxurious languor.”
Luxurious languor refers to a wealth-induced decadence. It is the affliction of those who “sink into the lethargy of a stupid and pampered luxury.”
The post-2008 epoch of artificially low interest rates raised the curtain on a species of luxurious languor.
Rates at or near zero reigned for an entire decade and longer. Credit was essentially… costless.
The United States economy got accustomed to it — even dependent on it.
Projects that would prove juiceless at higher rates of interest may yield juice at zero rates of interest.
And so they were undertaken at zero rates of interest.
Luxurious languor spread and spread in widening circles.
Yet… if this Clark fellow is to be believed… the epoch of luxurious languor is closing.
We shall likely transition from luxurious languor to non-luxurious rigor.
The business reduces ultimately to fundamental mathematics — and its iron laws.
“More Is Not More”
Mr. Matthew Piepenburg is a money man at Matterhorn Asset Management. Here he cites the abovesaid Hume:
- The folks at the big banks… who never bothered to study economics (or frankly basic history) forgot to tell voters and investors that beneath the last [16-plus] years of “luxury” and “recovery” lies a market secret (and economic virus) of which Hume warned in 1752…
- Specifically, Hume said this of debt: “More is not more.”
- That is, more debt does not create long-term growth; in fact, it mathematically destroys it.
- To confirm this market secret, one only needs to look at the history of what happens when government debt exceeds 50% of its income, or GDP. Once that ratio hits 50% of GDP, this is bad.
- And when that ratio hits 90%, the economy loses one-third of its growth rate.
There Are No Exceptions
No exceptions exist, says this Piepenburg fellow. That is because the dilemma reduces to mathematical equation.
It is science:
- This is not just true some of the time. It’s true all of the time, because economics, when understood, is not an art; it’s a science.
- Debt, when overextended, always kills growth.
- As of today, U.S. government debt to GDP, at [124%], is well past the point of no return…
- [Debt] buys a lot of shopping sprees and “luxurious languor,” from Wall Street to Main Street to Pennsylvania Avenue.
- But Hume’s market secret reminds us that any nation that doesn’t produce and earn as much as it spends is heading mathematically for a real moment of “uh-oh.”
I fear he is correct. Again, the mathematics is the mathematics and the science is the science.
And the science says a 124% debt-to-GDP ratio is economically lethal.
Two Options
Let us then conclude with Mr. Hume himself:
- Either the nation must destroy public credit, or public credit will destroy the nation. It is impossible that they can both subsist…
The entire economic and financial apparatus is constructed upon public credit.
The nation will not destroy that public credit — not voluntarily that is.
Thus option one goes emptying into the hellbox. Only one option remains.
And that is option two.
Brian Maher
for Freedom Financial News
