This article, a repeat from seven years ago, is actually more relevant today as the federal debt spirals out of control without even a solid crisis to explain it.
Those of you who are regular readers know that one of the basic principles of Barataria is that over the long haul there are very few surprises. Great empires come and go, economies hum along and then break, and new technologies add sparkle to our lives – but people are still people. When we take a strong half-step back, far enough for some perspective but not so far back we can’t keep our hands dirty, just about anything starts to make sense.
Today’s piece is a small summary of one small part of a breathtaking interview with Dr. Lacy Hunt of Hoisington Investment Management, conducted by Kate Welling and published by John Mauldin. The original article is a must read, but it takes hours to read, digest, and re-read. But there is one part that demands more discussion – and has a killer graph.
Given that the stock market appears to finally be taking a pause after a decade long run, this may seem like a terrible time to talk about subtleties like debt versus equity or how to finance federal debt. Yet this is exactly the time when something like what is proposed here would be useful for the government and investors alike.
Our national debt is financed through a complex system with fixed interest and market trading which is cumbersome and difficult. Worse, it ties the government down to fixed costs which are currently taking up 329B$ per year in interest payments, nearly $3,000 per household.
In short, there has to be a better way to manage the 21T$ or so of debt. Step one would be not creating more, but here is a plan for managing the potentially crippling debt we already have.
. As Barataria has discussed before, business cycles are not only real but heavily define the world in social and technical development terms. These cycles are, in purely economic terms, changes in availability and attitudes towards debt.
It is more than a little chilling to think that progress naturally comes in waves because of something as mundane as debt. But a system defined by money supply which has features that are destabilizing and work against sustainability and resilience is a large part of what we might call “capitalism.” The equilibrium of markets is pushed and pulled by the availability of capital.
One important feature of Fourth Wave Industrialization has to be that these cycles will need to be broken and greater monetary stability has to be achieved for a truly open market. This is likely to mean that equity will have to be favored over debt. But what, really, is the difference?
History is consistent in one important way. Empires always fall, and there are three main causes for the collapse. Succession crises, corruption and debt are what eventually bring them down. And the cause of debt is always an insatiable appetite for war – either from a need to defend the borders or expand them.
In the US today, there is no concern about succession, as our Founding Fathers made sure that wasn’t an issue. Corruption is certainly an issue, but it’s nowhere near Roman levels at this time. Debt, on the other hand is mounting rapidly.
What is the cause of that debt? Despite many deflections, it’s not caused by taking care of people. Our debt can be directly traced to our appetite for war.
The economy has been expanding since the start of 2010. It hasn’t been rapid, and It’s only now enough to absorb the workers who need jobs, but it’s real. It’s only natural for economists to ask, “When does it end?”
That’s not because they are extremely un-fun people. It’s their job. Recessions are a much bigger problem when no one sees them coming, and history shows that we never really see them coming. And that economists are always worried about the next recession, but we don’t really listen to them.
So is it time to panic? As Groucho tells us, “There’ll be plenty of time to panic later.”
This post from November 2015 is becoming more important as the federal deficit ratchets up and private credit is turning back up. I am leaving in the references to Sanders and progressive counters because they may well be current again.
If you’re like most people, you probably think that you can never have too much access to credit. After all, you never know what might go horribly wrong or when an opportunity to really follow your dream might come up. A little scratch ready in the background might be the difference between the good life and something much less.
Then again, a lot of credit has a corrosive effect. In a world saturated with borrowing everything is judged against the expected return if the money was simply loaned out at market rates. It seems reasonable that where a little credit is a good thing a lot of credit, defining everything in the world, is the biggest enemy of both long-term thinking and a society looking to maximize happiness and human potential.
Logic says that where a little credit is good a lot could be bad, meaning there is an optimal point. Where is that? Where are we with respect to a good level of credit? It turns out that train left the station a very long time ago – and this may explain a lot of the problems in this economy.
We’ve been talking about the stock market this week, so why not end it with a bold prediction: Once the federal debt ceiling is raised, look for the stock market to utterly tank within two weeks, certainly within a month.
While there are many reasons why the market is taking at least a pause if not slouching towards a correction, the most important is the appetite for government debt. A time like this requires careful management and attention to consequences. We’re not getting it. What we have instead is mismanagement on an epic scale that will certainly spook the market and ultimately kill it.