Interest Rates and Civilization

We have it on superb authority — the Institute of International Finance — that the world is presently $247 trillion in debt.

That figure, dear reader, represents a record high.

Global debt has surged $9 trillion since Jan. 1 alone… and $30 trillion since the close of 2016.

Were you aware that global debt is rising nearly three times the rate of global wealth?

Meantime, global interest rates remain near record lows — despite recent nods in the other direction.

Never in history has debt scaled such heights… never have interest rates plumbed such depths.

Each fact is remarkable in itself. But taken together?

Today we connect the dots… see how they all tuck together… and tease out the implications.

Richard Sylla professes economics at New York University.

He is also co-author of A History of Interest Rates (available through Amazon at a bargain-bin $63 per).

This book canvasses 5,000 years of interest rates… from ancient Babylonia to the glories of Greece and Rome… the Renaissance, the age of empires… all the way through to the 21st century.

Each historical epoch is distinct.

The investigator hunting meaningful comparisons between eras can be easily thrown off the scent… and end down a blind alley.

Yet despite the false leads and dead ends, Sylla believes he’s penetrated the mysteries of interest rate cycles throughout history:

“It seems like there is a U-shaped cycle for each civilization.”

Beginning at the top left of the “U,” interest rates begin a downward cycle.

Critically, Sylla’s research shows that as interest rates fall… civilizations rise.

Civilizations crest as interest rates near the bottom of the “U.”

These civilizational heights bring heroic deeds… great achievements… and golden ages.

Sylla claims this pattern was visible with Babylon, Greece, Rome.

In each case, Sylla observes “a progressive decline in interest rates as the nation or culture developed and throve.”

Near the turn of the 20th century, famous Austrian economist Eugen von Böhm-Bawerk glimpsed the same phenomenon. Writes Sylla:

Böhm-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.

(Caveat: We speak here of market interest rates — before central banking in its current form.)

But eventually the gods grow anxious of man’s advancing knowledge… his increasing achievements… his ascent up Olympus.

They know the solution…

The gods begin to tinker with man’s interest rates.

Rates start rising off the bottom of the “U,” up the right side of the slope.

The burden of accumulated debt rises with them.

The added weight throws chains upon civilization… the flame of achievement flickers… and it finally fades.

In this manner, each civilization Sylla studied “declined and fell.”

The message, clear as gin:

Civilization rises with falling interest rates. Fattened by debt… civilization falls with rising interest rates.

Now come home…

The year is 2018. Interest rates have begun to rise recently — if slowly — and haltingly.

They still remain at lows unseen in recorded history, besides a brief spell during the Great Depression:


But all cycles end… and history will not be forever put off.

Rates will return to “normal” one day.

If rates rise meaningfully in the years to come, is civilization in for a sharp “decline and fall” as befell civilizations past?

Sylla thinks yes, it’s possible:

We might say that our current low interest rates indicate that we’re at one of the high points of our civilization. Maybe things will get worse from now on.

Recall that civilizations gorge on debt in a falling rate environment… and collapse under that debt as interest rates rise.

Let us now redirect our focus to a unique form of civilization — American civilization.

U.S. interest rates have been in steady decline since their 1981 peak.

Meantime, the national debt has exploded:


Today the national debt runs to $21 trillion — and counting.

How will America service that debt if rates return to historically normal levels?

We hadn’t the heart to run the numbers. Financial analyst Daniel Amerman did:

If the interest rate on that debt were to rise by even 1%, the annual federal deficit rises by $200 billion. A 2% increase in interest rate levels would up the federal deficit by $400 billion, and if rates were 5% higher, the annual federal deficit rises by a full $1 trillion per year.

Incidentally… 5% higher are rates well within historical norms.

If interest rates do rise to historical levels and their relationship to civilization holds true…

Perhaps we should all light a candle for civilization…

Below, Charles Hugh Smith shows you why the stability of America’s status quo is an “illusion.” What comes next? Read on.


Brian Maher
Managing editor, The Daily Reckoning

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The Stability of America’s Status Quo Is an Illusion

By Charles Hugh Smith

The stability of America’s status quo is an illusion.

One of the enduring mysteries of the past decade is why inflation has remained tame while the central bank and government have pumped trillions of dollars of newly created money into the economy. Millions of words have been written about this, and so some shortcuts will have to be taken to make sense of it in one essay.

Let’s start with the basics.

Adding newly created money but not generating new goods and services of the same value reduces the purchasing power of existing money.

To keep it simple: say the economy of a country is $20 trillion. (Hey, the U.S. GDP is $20 trillion…) Say its money supply is $10 trillion.

So banks and/or the government create $2 trillion in new money but the value of goods and services only expands by $1 trillion. The “extra” $1 trillion of newly created money reduces the value of all existing money.

In effect, the new money robs purchasing power from all existing money. Those holding existing money have lost purchasing power while the recipients of the new money receive purchasing power they didn’t have prior to receiving the new money.

As debt has soared (and remember, debt is “new money” loaned into existence), GDP has risen at a much lower rate, so the ratio of debt to GDP has skyrocketed.

So what if debt has blown past GDP?

We’ve been paying our obligations with debt for the past decade. The debt to GDP ratio has skyrocketed as GDP has inched higher while debt has exploded. (Remove the fictitious “growth” in GDP and the picture worsens significantly.)

The steepening trajectory of debt is sustainable in a stagnating real economy with stagnating wages for the bottom 95% of the populace.

Federal, state and local governments pay interest on all the money they borrow to fund deficit spending, i.e. every dollar spent above and beyond tax revenues. All that interest is an increasing obligation that must be paid in the future. Borrowing more to pay interest increases the interest payments due in the future — a classic self-reinforcing runaway feedback loop.

Politicians get re-elected by increasing entitlements and obligations without regard to how they will be funded. “Growth” will effortlessly take care of everything — that’s the centerpiece assumption of all conventional economics, free-market, Keynesian and socialist alike.

The core constituencies of politicians are government employees and contractors, as these interest groups are funded by the government, which is nominally managed by elected officials and their appointees.

Nobody’s more generous (or demanding) than those feeding directly at the government trough. (By “contractors” I mean the vast array of Corporate America cartels that feed off government spending: defense, Big Pharma, Higher Education, etc.)

The obligations that have been promised are expanding at a nearly exponential rate, as healthcare costs continue to soar and the number of government pensioners is rising rapidly. The tax revenues required to fund these obligations are far outstripping the income and wealth of the bottom 95% of the populace.

Here’s the uncomfortable reality: the means to pay all these future obligations — the real-world economy, and the wealth and income of the vast majority of the populace — are far too modest to fund the fast-expanding obligations, which include interest due on the ever-increasing mountain of public and private debt.

Put these dynamics together and you get one outcome: the federal government cannot possibly pay all its obligations out of tax revenues nor can it raise taxes high enough to do so without gutting tax revenues via a recession.

The only way to pay all these future obligation is by creating new money, which in a stagnant, dysfunctional economy can only reduce the purchasing power of the currency, in effect robbing every holder of the currency of wealth and income.

Where “inflation” shows up depends on who gets the newly created money: the wealthy few or the wage-earning many. Wage earners who receive new money tend to save some of it but they also spend some of it.

But in our system, all newly issued money goes to banks, financiers and corporations — the super-wealthy few.

So what do already-wealthy people and companies do with trillions in new money?

They buy assets — stocks and bonds and real estate.

The net result of giving all the new money to the wealthy is the inflation of an asset bubble, which is precisely what’s happened in the past decade. Real estate: bubble. Corporate debt: bubble. Stocks: bubble.

Real-world inflation is certainly higher than official inflation, but the real inflation is in assets, which have tripled or quadrupled in a mere decade.

The inevitable consequence of asset inflation is rising income and wealth inequality. The wealthy few have gorged on assets with all the newly issued credit-money, and as the assets soared in value, they’ve become immensely wealthier.

But a funny thing happens on the way to extremes of wealth/income inequality: social unrest, disorder, revolt. The lackeys and apologists that serve the interests of the wealthy few label this “populism.”

But it’s really just the inevitable response to extremes of wealth/income inequality generated by funneling trillions in new credit-money to the wealthy few at the expense of wage-earners and holders of existing money.

To quell the revolt of the many, the Powers That Be will create trillions in new money and helicopter-drop it to the masses. This mass distribution of newly created money will flow into the real-world economy, not assets, and so the inflation will manifest in goods and services.

This helicopter drop of newly created money will be called pensions, Universal Basic Income, tax subsidies, negative tax rates, etc. There are a lot of names for distributing newly created money that’s been borrowed into existence.

This is precisely what Venezuela has been doing for a decade: distributing newly created money that isn’t matched by a corresponding increase in the production of goods and services. And as we know, the result of this has been the complete destruction of the purchasing power of Venezuela’s money.

“That can’t happen here” is just what the Venezuelans thought five years ago. But really, it boils down to math: creating money out of thin air and pumping it into a dysfunctional economy destroys the purchasing power of the existing money. Those receiving the new money are like a snake eating its own tail.

Real-world inflation will blow the doors off every forecast of low inflation forever.

From the point of view of the wealthy few who control the status quo in the U.S., they have a stark choice: either continue pushing wealth/income inequality to extremes that trigger social and political revolt, which puts their control at risk, or create and distribute trillions in “free money.”

They know this generates inflation, but the increases in the value of their assets have always far outstripped real-world inflation, so they don’t care about inflation. That’s for little people to worry about.

But what the wealthy few are forgetting is rip-roaring inflation destroys the system just as surely as wealth/income inequality. Just ask the Venezuelans how effective creating new money has been in terms of eliminating poverty: now their entire populace is impoverished, with the only exceptions being the wealthy few in control of the status quo.

The stability of America’s status quo is illusory. ‘Can’t happen here’ is going to ring mighty hollow in five years.


Charles Hugh Smith
for TheDaily Reckoning

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The Daily Reckoning