- “It seems like there is a U-shaped cycle for each civilization”…
- We may be seeing the decline of civilization…
- Jim Rickards issues an urgent warning for all investors…
Dear Reader,
Dr. Richard Sylla professes economics at New York University.
He is also co-author of A History of Interest Rates (last revised in 2005).
This magisterial work canvasses 5,000 years of interest rates.
From ancient Babylonia to the Western cradles of Greece and Rome… to the Renaissance, to the age of empires… clear through to the early 21st century… the professor takes them all under his microscope.
Each epoch is unique.
And the historical detective in hunt of unifying patterns can easily be foxed and deceived.
He often chases phantoms.
Yet despite the false leads and dead ends, Dr. Sylla believes he has penetrated the mysteries of interest rate cycles throughout history:
“It seems like there is a U-shaped cycle for each civilization.”
Interest Rates and Civilization
He begins his inquest at the top left location of the “U.”
From that location, interest rates embark upon a downward journey.
And the professor’s researches reveal that as interest rates fall… civilization rises.
These civilizational heights bring heroic deeds. Fantastic achievements. And golden ages.
In each instance, Dr. Sylla observes “a progressive decline in interest rates as the nation or culture developed and throve.”
Near the turn of the turn of the 20th century, “Austrian” economist Eugen von Böhm Bawerk glimpsed the identical phenomenon. Writes Sylla:
- Bawerk declared that the cultural level of a nation is mirrored by its rate of interest: The higher a people’s intelligence and moral strength, the lower the rate of interest.
Yet eventually the gods grow anxious of man’s advancing knowledge… his increasing attainments… his ascent up Olympus.
They begin to fidget with man’s interest rates.
Debt, Rising Rates, and Falling Civilization
Rates begin rising off the bottom of the “U” — and up the right hand side.
The pace of civilization slackens… and the flame of achievement fades.
Debt is the water that douses the flame.
Dr. Sylla notes that civilizations fatten on cheap debt.
And when interest rates begin rising, the burden of that debt also rises.
At this point, each civilization Sylla studied “declined and fell.”
The message, clear as gin, goes this way:
Civilization rises with falling interest rates. Debt is cheap under the low rate regime. Drunk with debt, civilization falls with rising interest rates.
Is Civilization Fading?
Beginning in the early 1980s, interest rates took the downward leg of the “U.”
Rates on the 10-year Treasury note, for example, declined very substantially for decades.
Wrote Dr. Sylla some 20 years ago:
- We might say that our current low interest rates indicate that we’re at one of the high points of our civilization.
Yet all cycles end… and history will not be forever put off.
“Maybe things will get worse from now on,” he continued… ominously… presciently.
Now come home.
The multi-decade trend of descending rates appeared to end in 2023.
Rates descended to the bottom of the “U.”
They have since assumed an upwards trajectory… up the ascending side of the “U.”
That is, towards the civilizational decline portion of the cycle:
Source: econbrowser.com
Can we expect rates to maintain their present, anti-civilizational heading?
Rates Have Turned a Corner
Dr. Sylla was interviewed, recently, by the gentlemen of Financial Sense Newshour.
From which:
- I’m… confident that this represents a really long-term turn in interest rates. And we can probably expect interest rates to be on a rising trend. I don’t think they’ll get back to double digits like they did in the 1970s. But I think we have turned a corner, and we can probably look forward to a period when interest rates are trending upward rather than downward.
And so the cheap debt acquired on the left side of the “U”… becomes a civilizational malignancy on the right side of the “U.”
Debt service chokes civilization as rates assume their northern trajectory.
This year, for example, the United States will ladle out more money for debt service than for defense.
And as Dr. Sylla observes:
- My friend Niall Ferguson, a well-known historian, says that when countries spend more on interest on their debt than they spend on defense, that’s a sign of trouble ahead for them.
Ferguson’s Law
Writes the referenced Mr. Ferguson:
- What I call Ferguson’s Law states that any great power that spends more on debt service than on defense risks ceasing to be a great power…
- The crucial threshold is the point where debt service exceeds defense spending, after which the centripetal forces of the aggregate debt burden tend to pull apart the geopolitical grip of a great power, leaving it vulnerable to military challenge…
- The fact that the U.S. is currently projected to spend a rising share of its GDP on interest payments and a falling share on defense means that American power is much more fiscally constrained than most people realize.
- By 2049, according to the CBO’s latest long-term budget projection, net interest payments on the federal debt will have risen to 4.9% of GDP. If defense spending maintains its recent share of discretionary spending, it will amount to half that share of GDP.
There you have the formula for civilizational decline.
Let’s Just Inflate Our Way Out of It
How will the United States government confront the crisis?
It will encourage inflation, argues Dr. Sylla:
- Social Security, Medicare — those are large entitlements, and it’s legislated that they have to be paid come hell or high water. So I don’t see any sign that somebody is ready to cut Social Security or cut Medicare. How is the government going to handle this?
- I think that the only way the books balance is if we have a higher rate of inflation. My expectation is that, despite the fact that the Fed is trying to get back to a 2% inflation level, given our fiscal situation, we’re going to have a higher rate of inflation, and we have to pay the inflation tax because we won’t allow spending cuts, and we won’t allow real tax increases.
Higher inflation — of course — invites higher interest rates.
And higher interest rates, in Dr. Sylla’s telling, equal civilizational decline.
Good News and Bad News
Yet I am in a rare optimistic turn of mind today.
Let me then rotate my view to the sunlit side of events.
Interest rates will one day attain their anti-civilizational crescendo.
They will then resume the next cycle of declining rates — and rising civilization.
Civilization will flower yet again.
Of course… you will not likely witness it.
You will be long dead.
Brian Maher
for Freedom Financial News
