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“Any corporation, private or governmental, that wishes to provide for a sound and equitable continuity of its business must take steps towards the systematic retirement of debt immediately after it has been incurred. Postponement of all payment for property or privileges by those who presently enjoy their benefits is calculated to bring uncomfortable consequences to them or those who succeed them.”

— Engineering Economics, by  C.R Young. 1949

We frequently hear pundits and talking heads talking about how short-sighted government policies and unfunded entitlements are in essence “stealing from the future” or at best “borrowing from the future” and I found myself thinking about the difference between the two ideas.

Normally when we think about “the two kinds of debt” we think productive versus unproductive debt. Exemplified in the Richard Kiyosaki “Rich Dad / Poor Dad” series, we learn that productive is that which you incur and then use in a way that will help pay itself off.

Examples include vendor or bank financing for buying a business that you would then pay back with the earnings from said acquisition, something I’ve done a couple times over my career; or taking out a mortgage to buy an investment property. From there  you would use the rent to pay off  the mortgage.

I emphasize paying off the mortgage here as opposed to simply servicing the debt with minimum payments or interest only, and we’ll see why shortly. Contrast this with unproductive debt, which is borrowing money to go on vacation or buy consumer goods, or do anything else with it that leaves you with the bill afterward. As Kiyosoki frequently stresses, it’s the difference between debt that makes you money vs debt that costs  you money.

Now, what is the difference between borrowing from the future and stealing from the future? Debt is aptly described as pulling future demand or future productivity into the present. Government entitlement programs and ballooning deficits do this with abandon. So do companies, like the high flying Netflix which is a FAANG favorite but is carrying about $10 billion in bonds on the books, having recently issued another $2 billion in junk bonds just to fund their content development for the next six months.

What’s the big question?

It’s this: is there a realistic plan that this debt will be paid off in the future? Or is the plan to simply roll it over, in perpetuity?

We know Big Governments the world over have incurred debt that cannot, ever, be paid off. Maybe they’ll be liquidated via default, or hyper-inflated away, but that’s not the same as paying them down. I call that stealing from the future. If there is actually a plan to pay the debt down, then that’s a borrowing from the future.

At the governmental level, in the US at least, that hasn’t happened since Eisenhower, who was the last president to actually reduce the national debt. The last president who actually paid off the national debt was Andrew Jackson (those fabled “Clinton-era surpluses” were somewhat of a sleight-of-hand fiction, take a look at the chart here to see them in context).

If we take the two kinds of two kinds of debt, then we get ourselves a nice matrix or grid:

The two sides are Why vs How. Why are you borrowing money? vs How will you structure it, as borrowings or theft against the future?

The examples in each quadrant are just that, examples. Will Netflix ever pay down those bonds? Maybe the CFO thinks they will, someday. Or maybe they plan to just keep rolling it, in which case it should be over with share buybacks in the bottom-right quadrant.

The more I thought of it, the more I couldn’t come up with a legitimate use case that would put productive debt into the stealing (perpetual debt) quadrant. All justifications aside, it will wind up in the unproductive quadrant because time is the enemy of debt, at any price.

But wait, what? Share buybacks are unproductive? Most of the time, yes. Especially lately, when companies are borrowing money at artificially low interest rates to buyback their shares trading near all-time highs. As I observed in The Transition Overview, “the value investor in me finds that kind of stupid”.

The poster child for all this lately is GE, who spent $40 billion on stock buybacks between 2015 through 2017 on shares that have declined in value 75% since. The company is now has a tangible net worth at negative $48 Billion. My mom’s pension is with GE, as my dad worked on the shop floor there for 30 years.

I remember assuring her a few years back that no matter how badly GE messed themselves up, there was no chance they would bankrupt themselves …along with their pension liabilities, in her lifetime. She was around 86 at the time and it’s now looking like she’s the one who’s going to outlive General Electric.

After the last financial crisis I came across a web hosting company that had attempted to grow via leveraged acquisitions, borrowing more and more money to buy up ostensibly “accretive” companies but when everything blew up, they were offside on all of their covenants and couldn’t possibly repay the debt. I wound up in talks to acquire them from a hedge fund who had somehow inherited the debt and with it the entire company after some sort of Bear Sterns style shotgun wedding with another hedge fund in order to survive.

They showed me the CEOs plan to fix the situation should the hedge fund (or me, if I bought the company) accept his proposal to restructure the debt.

The plan was to take out another loan to do some more acquisitions!

I took one look at that and said “no thanks”. A few years later I bought some other business as part of a carve-out. I financed that with a vendor take-back and paid down the loan in full a year later. That unit has produced a minimum of 100% of the total purchase price in earnings every year since. That would be a Quadrant A style investment.

More recently, today in fact, which is what got me thinking about all this, I just walked away from a deal I’d been working on for a little over a year. It involved taking a significant ownership stake in a very small publicly traded company (I never accrued more than 1% of the equity, had I gone through with it I would have been a full-on insider with 12.77%). Anyway – same story. They had levered up a few years ago to do an acquisition. This was also Quad A investment – productive and they planned to pay off the debt in 3 years. Only the market conditions changed. Now they can’t pay off the debt and they had to dilute all the shareholders by half to restructure the debt last year. That’s the problem with debt, even when you plan to pay it off, if you’re too levered, it can still kill you.

With the latest, even relatively benign, rise in interest rates, all sorts of these fissures have begun to appear throughout the system.

The permabulls are betting on a new Powell Put so that interest rates can’t climb too high but that is another problem in itself. No matter what happens, the stairway to heaven stock market rally, and the leveraged buyback orgy of the last 10 years is for all intents and purposes, over.

So now the bills come due. I’ve said it before, when these kinds of shifts happen or cycles turn, it’s the debt load that separates the survivors from the statistics.

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There is an ever-widening recognition that started some time ago that we are living through an age of transition from a unipolar world that existed after the collapse of the Soviet Union, to a new multi-polar one.  This has been spoken about outside polite company for at least the past decade (I remember William Buckler, the Privateer, was already saying as much as far back as 1998-1999 when I became a subscriber, if not earlier). It was never a matter of “if” as much as “when” and what the ultimate catalyst will be.

We’ll probably all concede we’re there the day that the US dollar loses it’s status as the global reserve currency, but who knows what specifically will lead up to that or what the timeline will be. One of my absolute favourite quotes is Douglas Casey’s “Just because something is inevitable, doesn’t make it imminent”.

For now, while Venezuela implodes and Turkey looks headed for a wipe-out and capital controls, the USD is still a destination for capital flight.

This morning I came across a chart on Twitter that put things in perspective for me, I didn’t save it so it took some searching when I sat down to write this but I found it here:

It’s from Jon Gabriel’s 2015 article “Athens on the Potomac” where he took time out from the then brewing Greek debt crisis to point out the US’s own balance sheet looked hauntingly familiar, if not an order of magnitude larger. If pundits were wondering how on earth the Greeks thought that their levels of debt were sustainable, what must they think when they look at this?

Of course, people like Krugman think this doesn’t matter. The US has the world’s reserve currency and the Greeks, not so much. That makes the chart above, apparently, sustainable, since no sane US politician would make any serious move to reverse it.

Another reason I like this chart so much is because it puts those hallowed “Clinton Era surpluses” (which were more slate-of-hand than actual surpluses) in perspective. With the Trump tax cuts and trillion dollar deficits, this chart will simply continue on trend.

The other data set I came across was when “Fed Up” author Daniella Dimartino tweeted W Ben Hunt’s “When Things Fall Apart, Part 1“, a good read not about the debt bomb but about the polarization of the voting populace in the USA. The theme of his post “The Center Cannot Hold” finally captured something that I’ve been trying to articulate in private, and failing. It’s the fact that the “left” vs “right” dichotomy has likely passed a point-of-no-return in the USA.

If you read Hunt’s article carefully, you will get that he is saying there will be no return to normalcy. From here on out the US will be whipsawed between the right and the left with ever-increasing intensity and escalating polarization:

what’s the problem with a bimodal distribution? The easiest way to think about it is to compare the size of the purple area (where both the Republican and the Democrat electorate overlap) with the pure blue area (Democrat with zero Republican overlap) and the pure red area (Republican with zero Democrat overlap). When the purple area is smaller than both the blue area AND the red area, a centrist politician (someone between the median Democrat and the median Republican) can win neither a national nomination nor a national election in a two-party system. For any centrist candidate or policy, there exists a winning majority of voters on both the left AND the right who will favor a competing candidate or policy on both the left AND the right. This is what it means to say that the center cannot hold.

This chart is why incumbent Republicans who speak up against Trump or Trump policies lose their primaries to 9-11 Truthers and that incel-in-training kid in 10^th grade history class who proclaimed that the Civil War wasn’t really about slavery. This chart is why incumbent Democrats who aren’t outright Socialists lose their primaries to latte-sipping, fashion-forward young things who honest-to-god believe that Fidel Castro and Yasser Arafat had some pretty good ideas if you just stop and think about it.

This chart is why mainstream and relatively centrist political candidates lost

Hunt compares this bimodal distribution with what happened in the decline and fall of the Roman Empire, only that took 400 years to play out. People like Jon Micheal Greer, in The Long Descent, make the case that the US Empire will end in a similar, drawn out, wind-down fashion similar to Rome, as opposed to a collapse into Mad Max style fighting over tins of dog food.

The two data sets considered together to me hammer home the point that America will never recapture the apogee attained after the post-World War II boom and ensuing collapse of the Soviet Union. It may last a lot longer than anybody expects (I’ve personally posited Trump as the second-to-last US president of a unified USA, but I am usually always wrong on time frames, always).

The big questions then are:

• What will be the catalyzing event to end the current monetary regime and what will replace it?
• What would a post-nation-state America look like? Snow Crash? Daemon? Black Mirror?
• What is the time frame? Are we looking at 10 years? 50? Or should we be measuring this in generational increments?
• Does factoring in an eventual end to US hegemony change your business or your life calculus?

Less importantly but will get more press coverage:

• If (the remaining) US presidents continue on the theme of escalating shock value, who can possibly top Trump?

The third aspect to this, which I didn’t cover here, is the Thucydides Trap: if the US Empire is truly in unrecoverable decline, who ascends and does the friction between the challenger and the incumbent result in a war or no war? Graham Allison’s “Destined For War” looks at this question, he found that out of 18 previous situations throughout history when an Empire declined, 12 of them resulted in a war with the rising challenger.