“Hell Is Truth Seen Too Late”

“Hell is truth seen too late,” wrote Thomas Hobbes — sternly, grimly, gravely.

We fear the United States will see truth too late…

The truth, for example, that a comatose economy does not simply jolt to life at a button’s touch…

That extravagant debt levels murder growth…

That the costless midday meal has no existence.

Someone, somewhen, someway, must pay.

How Can It Continue?

The United States economy has hemorrhaged perhaps $25 billion each day of this economic coma.

No economy can withstand months and months and months of it.

The lights must wink on, the machinery must begin to whine, the workers must punch the clocks again.

The entire economic and financial system was dreadfully indebted before the pandemic.

Now it is plunging deeper and deeper into debt without the economic activity to brunt the cost.

GDP has contracted at a savage rate — as government spending has expanded at an equally savage rate.

That is, Americans are purchasing more and more lunch on more and more credit.

The Most Gluttonous Debt Binge in All of History

United States national debt has expanded $3 trillion in a mere six months — the most gluttonous debt binge in all of history.

At $26.6 trillion, national debt presently equals some 130% of the gross domestic product.

Never has the ratio been higher.

Today’s debt-to-GDP ratio outdoes the previous record of 121% from 1946 — after the United States emptied its pockets to scotch the Axis.

Today it has emptied its pockets to scotch the virus.

This year’s budget deficit is already racing for $4 trillion. But it could rise to $6 trillion after another serving of lunch.

Democratic and Republican “negotiators” are hard at work in the kitchen…

A 6-Inch Sandwich or a 12-Inch Sandwich

Only its dimensions — a six-inch sandwich — or a 12-inch sandwich — are at issue.


The negotiators are trying to reconcile differences between the $3.5 trillion Democratic plan passed by the House in May and the $1 trillion package that Senate Republicans introduced last week.

But, it is an election year.

Republicans do not wish to sport the black hat… and appear indifferent to suffering humanity, to hungry humanity.

Thus, we expect the 12-inch submarine sandwich. Or perhaps, a 10-inch submarine sandwich.

Either way, it goes upon the credit card.

The Lunch Bill Comes Due

Here is the difficulty of course:

Government claims no resources of its own. It collects them in one of two ways.

It presses a pistol against the citizen’s ribs… and plunders his wallet.

Or it takes to the credit markets, empty cup in hand.

But even if the government borrows, the pistol goes against the ribs.

Recall, the citizen must pay taxes to service the lending.

And how — again — does the government haul in taxes?

Either way… the citizen pays. His lunch bill comes due.

In days such as these, we might recall the timeless principles of economics…

Quack Panacea for Economic Ills

Here is Henry Hazlitt from his masterly primer on economics, Economics in One Lesson:

Everywhere government spending is presented as a panacea for all our economic ills. Is private industry partially stagnant? We can fix it all by government spending. Is there unemployment? That is obviously due to “insufficient private purchasing power.” The remedy is just as obvious. All that is necessary is for the government to spend enough to make up the “deficiency”…

Here we shall have to say simply that all government expenditures must eventually be paid out of die proceeds of taxation; that to put off the evil day merely increases the problem… Once we look at the matter in this way, the supposed miracles of government spending will appear in another light.

The supposed miracles of government spending spring from Lord Keynes and his famous multiplier…

The False Miracle

It is the miracle of water into wine. It is the miraculous multiplication of five bread loaves and two fish into food for the multitudes.

It is the free lunch.

This is the promise of the Keynesian multiplier and its devotees.

It may appear miraculous under debt-free conditions.

But today’s system is so soaked through with debt… additional debt does not yield wine… but vinegar.

It divides, not multiplies, bread and fish.

Each dollar borrowed since 2008 has yielded under $1 of growth. It is perhaps 40 cents, by some estimates we have encountered.

It is a sort of miracle in reverse, an anti-miracle.

It merely piles up to unholy levels of debt. And debt drains the future… leaving it barren and empty.

Plunging into debt introduces a sort of hand-to-mouth living. It diverts cash flow to the service of existing debt — often unproductive debt.

And so, investment in the future is sent channeling backward. It is a titanic larceny of the future.

And artificially low interest rates are the stickup gun…

The Curse of Artificially Low Interest Rates

Lance Roberts of Real Investment Advice:

Low to zero interest rates incentivize non-productive debt. The massive increases in debt, and particularly corporate leverage, actually harm future growth by diverting spending to debt service…

The rise in corporate debt, which in the last decade was used primarily for nonproductive purposes such as stock buybacks and issuing dividends, has contributed to the retardation of economic growth…

The massive debt levels being added to the backs of taxpayers will only ensure lower long-term rates of economic growth.

It is the economics of the hamster wheel — frantic — but stationary.

We therefore expect no V-shaped recovery like the “rah-rah men” croon about.

We expect, rather, a protracted guttering along, a futile running in place, a languishing in purgatory.

More, More, More!

But the good Dr. Paul Krugman does not believe present borrowing is adequate to purposes.

He exhorts the government to load on additional debt because interest rates are so low:

The government will be able to borrow that money at incredibly low interest rates. In fact, real interest rates — rates on government bonds protected against inflation — are negative. So the burden of the additional debt as measured by the rise in federal interest payments will be negligible.

Yet is borrowing at extremely low rates a warrant to plunge deeper into debt?

It is true, the government can presently borrow at low rates. But this is likewise true…

Rates will not remain forever low. Invincible time will balance the scales ultimately.

Heading for Hell

When rates do return to historical averages — 3-5% — debt service could wash out the entire budget.

Prior to this crisis, the Congressional Budget Office already projected debt service would scale $915 billion by 2028 — nearly 25% of the entire budget.

Only the Lord — the Lord above, that is — knows the ultimate figure. But it will likely be far higher than prior estimates.

How will the government afford to pay for anything else? And how is America to rebuild its finances?

We do not pretend to know. Perhaps it cannot.

If hell is truth seen too late… the nation may be careening for a very hot place.

The mercury is already rising — fast.


Brian Maher

Brian Maher
Managing Editor, The Daily Reckoning

The Daily Reckoning