We’re Devouring Our Seed Corn

We Risk a Barren Future [The Daily Reckoning] November 04, 2023 [WEBSITE]( | [UNSUBSCRIBE]( We’re Devouring Our Seed Corn The Hawaiian Islands Editor’s note: In farming terms, seed corn is high-quality corn kept for seed. In economic terms, seed corn represents productive investment in the future. Today, Charles Hugh Smith argues that we’re devouring the seed corn that should be dedicated to future growth. [Charles Hugh Smith] CHARLES HUGH SMITH Dear Reader, If we're limited to our income, there's only so much we can spend on consumption and servicing existing debts, and invest/save to build capital/future income. If we have access to the miraculous elixir of credit, we can expand our spending/investing by borrowing more money. This boosts our consumption and perhaps our investing, but it also increases our debt service — the interest that must be paid on debts old and new. When interest rates are near-zero/less than inflation, this burden is light. Once interest rates return to historic norms, however, large debt loads generate large interest payments, and the elixir of credit becomes a toxin sapping the borrower of income and an unencumbered future: Rather than having the option of saving income to invest in the future, the borrower must devote an increasing share of income to debt service. Unless income is rising faster than debt service, the tapeworm of debt service starves the borrower. This dual nature of debt — elixir and toxin — is scale-invariant, meaning that it functions in the same manner on the small scale of households all the way up to nation-states. This conveyor belt of squandered wealth looks sustainable as long as debt can skyrocket at near-zero rates of interest. But those days are gone, never to return. Borrowing more money now costs money, and so long after the unrepairable, low-quality gew-gaw is rotting away in the landfill, the debt used to purchase it lives on, eating the borrower alive. We’ll Just Grow Our Way out of It The vast horde of cheerleaders of debt always claim "we'll grow our way out of debt": By investing the borrowed money in wonderfully productive things, the economy (and household income, corporate profits, etc.) will grow so smartly that the debt service will remain a paltry and inconsequential percentage of spending. The rosy forecast is the U.S. is investing in reshoring/re-industrialization/energy transition, and all these will jump-start growth for decades to come. Yes, we're borrowing trillions of dollars, but these dollars are being wisely invested in future productivity and improved national security. [URGENT: Before You Buy Another A.I. Stock…]( [Click here for more...]( James Altucher has been pounding the table on A.I. all year, urging investors to get in… Today, he’s changing his tune. Whatever you do, he warns, don’t buy another A.I. stock until you see this video. Because there’s a much bigger opportunity involving A.I. – one which the mainstream media ISN’T reporting on. [Click Here For The Urgent Details]( The cheerleaders point to the history of the past 60 years as proof that this dynamic of "growing our way out of debt" can be counted on into the future. Nice, but the cheerleaders forgot what happened in the 1970s, a decade of high inflation, rising costs and uneven expansion. The conventional explanation for this stagflation focuses on the "oil shock" of sharply higher oil prices in 1973–74, the rise of global competition and rising bond yields/interest rates. But as I explained in my article “The Forgotten History of the 1970s,” a major contributor to the stagflation was the enormous investments that were poured into cleaning up America's polluted air and water, and re-engineering the nation's industrial base to be cleaner and more efficient. The eventual payoff was huge, but it took decades to reap the rewards, which in this case included restored waterways and a more efficient industrial base. Note that this enormous investment did not generate more corporate profits or consumption. From the point of view of "growth," it was a monumental money-pit, for the payoff — a cleaner environment — did not generate profits or growth until far down the road. Eating Our Seed Corn The same dynamic will play out in the vast sums that must be sunk into reshoring/ re-industrialization/energy transition, a process that raises costs for years or even decades before the eventual benefits outweigh the enormous costs. Given higher rates of interest, borrowing trillions to fund both consumption and investment is in effect eating our seed corn as consumption isn't an investment that generates a return, and the return on vast investments with payoffs far down the road will jack up interest payments and other costs without generating the "growth" cheerleaders count on. The federal government has many obligations and many constituencies. Seven decades of economic expansion has raised expectations of every constituency for more federal funding. This has generated what I call the Savior State, a central government tasked with meeting every constituencies' needs with few limits. [The 2 AI investing traps revealed [must read]]( Investor and entrepreneur James Altucher made millions during the crypto boom. Many “experts” are now saying… Artificial Intelligence opportunities could be even bigger. But don’t believe the hype. Before you invest one penny in AI… See James reveal the 2 AI investing TRAPS that will doom many investors… Yes, making money from AI SHOULD be easy… But most AI investors will fall flat on their faces. Because they don’t know the 2 AI investing TRAPS… [See The 2 AI Investing Traps Here Now]( If borrowing and debt service rise faster than the returns on investment, the borrower goes broke before the return on investment catches up with the soaring cost of servicing the skyrocketing debt. Historical studies suggest problems of solvency and crimped spending arise once the national debt exceeds the national output, i.e.. GDP. When debt rises above GDP, the nation starts consuming its seed corn to maintain consumption. Savior States have an unsolvable problem: Their social pension and health care programs were designed for economies with five full-time workers for every retiree. Now the ratio is closer to 2-1: two workers (134 million full-time wage earners) for every retiree / recipient (67+ million recipients of Social Security and Medicare). You can talk about the military-industrial complex. But social pension/health care programs are 44% of the federal budget (Social Security, Medicare and Medicaid). As the cohort of beneficiaries increases and costs of health care increase, federal spending will rise regardless of any other factors. Since federal revenues don't cover expenditures, the Treasury is borrowing trillions of dollars, guaranteeing the interest payments of the government will rise significantly. Can we maintain a 70% consumption economy without bankrupting the nation? “Something’s Gotta Give” Combine the vast requirements for investments with minimal immediate financial payoffs with social pension/health care obligations designed for an economy that no longer exists, the expectations that consumption "should" keep expanding regardless of debt/interest payments and the impossibility of funding all this out of revenues, and the answer is: something's gotta give. What will break is not as predictable as the reality that the current trajectory is untenable and unsustainable. The depravity of borrowing money to squander on things of questionable or temporary value was visible 60 years ago, and the depravity will soon consume all those who believe this system is sustainable. What's the opposite of a depraved dependence on debt to buy stuff of questionable or temporary value? Buying tools with cash and learning how to use them to create value for oneself, one's household and one's community, and consume/share/sell what one produces. You need to become self-reliant. Like what you’ve read? [Go here for more.]( Regards, Charles Hugh Smith for The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) Editor’s note: [This could be the single best way to help protect your wealth from what Jim Rickards calls “Biden Bucks”…]( That’s the administration’s hush-hush plan to create a government-controlled digital dollar. And even though Jim’s been warning about this for months now, he still argues that [this new digital dollar could be the single greatest threat to your freedom that we’ve ever seen…]( But the situation isn’t hopeless. [Here’s what you can do to fight back.]( Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) [Charles Hugh Smith] [Charles Hugh Smith]( is an American writer and blogger, and serves as the chief writer for the blog "Of Two Minds". Started in 2005, this site has been listed No. 7 in CNBC's top alternative financial sites, and his commentary is featured on a number of sites including Zerohedge.com, The American Conservative, and Peak Prosperity. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your The Daily Reckoning e-mail subscription and associated external offers sent from The Daily Reckoning, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. 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