"The End of 'Luxurious Languor'”
by Brian Maher
“'Luxurious languor'…We hazard the epoch of luxurious languor - 18th-century philosopher David Hume’s delicious expression - is closing. It acquired its existence through the post-2008 imposition of artificially reduced interest rates. 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. This unnatural epoch fattened a particular group of the languorously luxuriant…
Nothing Changes but the Date: In 1752 the abovesaid Hume authored an essay, “Of Public Credit” by title. From which: "In this unnatural state of society, the only persons, who possess any revenue beyond the immediate effects of their industry, are the stock-holders, who draw almost all the rent of the land and houses, besides the produce of all the customs and excises.
These are men, who have no connexions with the state, who can enjoy their revenue in any part of the globe in which they chuse to reside, who will naturally bury themselves in the capital or in great cities, and who will sink into the lethargy of a stupid and pampered luxury… Adieu to all ideas of nobility, gentry and family."
Switch 1752 for 2012 or 2022. Are they not the same? Yet the reign of zero rates is ended. The reign of luxurious languor will likely end with it. Not today perhaps. Perhaps not even tomorrow or the tomorrow after that. Yet end it will.
This week yields on the bellwether 10-year Treasury note scaled 5%. They have since receded some… as the daily and tides recede routinely from their heights. Yet in the natural cycle the tide reacquires its height. As with nature, so with markets. We believe yields will once again attain the 5% tidal mark. They will likely exceed it. And the sand structures erected in low tide - under luxurious languor - will go washing away under high tide. We shall label this phase “non-luxurious rigor.”
Time and Tide Claim All Ultimately: These structures remain largely intact. Yet the tides run to lagging cycles. And expiring debt - acquired at the low tide of zero rates - must be refinanced under higher tide. At this point sandy foundations begin to give way… and luxury is not nearly so langourous. It is perilous. It is non-luxurious rigor.
Mr. Dan Amoss is Jim Rickards’ senior market analyst. He is an authentic market crackerjack with a skull ear to ear and chin to crown with knowledge. From whom: "Corporate debt is about $40 trillion. The longer yields stay at 5% or higher, the more corporations will have to refinance at that rate. It’s going to have a depressing effect on the economy. There’s a huge difference between an economy that has a zero cost of capital, and one that has a 5% cost of capital. It changes everything."
It puts a period to the languorously luxurious epoch. That is what it does. The business reduces ultimately to fundamental mathematics - and its iron laws.
There’s a Limit: Take a 200-pound man. Place 100 pounds upon his back. If he is a somewhat stout and hearty fellow, this burden he can withstand. It is merely half his weight. Now place 200 pounds upon his back - his own bodyweight. He may quake some. He may perspire some. Yet if he is a man of normal construction, if his muscles have not atrophied under languorously luxuriant living, he can absorb the load. He can even stagger ahead some. Not much perhaps - yet some.
Now load an additional 50 pounds upon his back. You have exceeded his capacity. The additional 25% of his weight proves too much. He can retain the vertical, the burden will not buckle him or bring him heaping down. Yet he is unable to advance. He can merely stand where he is.
Now you understand the economy of the United States. Ample evidence indicates that an economy can withstand a 90% debt-to GDP ratio. Once that ratio exceeds 90% the economy proceeds to strain and stagger. The United States debt-to-GDP ratio runs presently to 125%, roughly. It is the normal 200-pound man with 250 pounds upon its back. It can stand, it is true. Yet it cannot walk. It is overloaded.
“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 [14-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.
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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."
We fear he is correct. Again, the mathematics is the mathematics and the science is the science. We refer not to “the science” of Dr. Fauci - but to the demonstrable science - to the authentic science. And the science says a 124% debt-to-GDP ratio is economically lethal.
Nixon Started It: When did the United States begin to flout the mathematical laws? When did its debt addiction and ultimate descent into languorous luxury commence? In 1971 says Mr. Piepenburg: "[It all] went downhill when Nixon famously declared, “I guess we’re all Keynesians now,” meaning we all ignored the market secret and became enamored by (addicted to) debt."
Why? Because debt is fun. It 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.”
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 it - not voluntarily that is. Thus option one goes emptying into the hellbox. Only one option remains. And that is option two…"
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