“There ain’t no such thing as a free lunch.”
Nobel Prize-winning economist Milton Friedman used the expression so often that it has its own Wikipedia page and a popular acronym: TANSTAAFL!
“There ain’t no such thing as a free lunch” is a handy expression for an unavoidable economic principle, one that can be applied in countless ways. We acknowledge it with double-entry accounting, which employs two entries for every transaction, both debit and credit.
It means that when the monetary authorities print money, it is not free. It has a cost: the money will be worth less. (The Founders knew this, which is why they specified a currency system disciplined by gold and silver. As we are fond of saying, “They can’t print more gold!”)
If the central bank raises interest rates, it may benefit lenders and creditors, but it will cost borrowers. Many debtors will find themselves in trouble.
That is because TANSTAAFL. Spending is not free. Taxing is not free. Printing money is not a free lunch, either. Someone will pay. Nor is raising interest rates to offset all that money printing free. Someone will pay.
Stated differently, the Fed has been expected to hike interest rates until the bill shows up. Until something breaks.
We’ve seen the first round of things breaking in the failure of banks like Silicon Valley, Signature, Credit Suisse, and First Republic, each having paid the price of higher rates. Now the damage is spreading with a train of corporate bankruptcies.
Here are a few snippets of recent bankruptcy news:
NYTimes, 5/18/23: Corporate America Faces a Bankruptcy Boom
- New data shows that 2023 is shaping up to be the biggest year for Chapter 11 filings in more than a decade.
Axios, 5/8/23: Private equity’s looming bankruptcy boom
- S&P Global Market Intelligence reported that 16 PE-backed U.S. companies filed for bankruptcy protection during the first 75 days of 2023.
- If that pace were maintained, 2023 would be the top year for PE-backed bankruptcies since 2010.
ZeroHedge, 5/26/23: US Corporations Are Filing for Bankruptcy at The Fastest Pace Since 2010
- One would not know it from looking at the S&P, which just hit a 2023 high, but there is a bit of a bankruptcy crisis sweeping the U.S. where companies are filing for bankruptcy at the fastest pace in 13 years, in a clear sign of a tightening credit squeeze as interest rates rise and financial markets have locked out all but the strongest borrowers.
- The increase is most visible among large companies, where there were 236 bankruptcy filings in the first four months of this year, more than double 2022 levels and the fastest YTD pace since 2010, according to S&P Global Market Intelligence.
The trillions of dollars the Fed created in the years following the panic of 2008 were the apparent free lunch, the surging liquidity creating bubbles far and wide. Now the leveraged economy is facing the bills, showing up first in banks and now in corporate bankruptcies.
It turns out the lunch was not free. There ain’t no such thing, which brings us to the United States, the world’s biggest debtor, and the world’s biggest debt bubble. If Washingtonians thought they could run the debt up to today’s ceiling of $31.4 trillion, perhaps they could be excused because Fed interest rate suppression allowed that debt to accumulate under some of the lowest interest rates in history.
No longer. Now the interest component of the national debt is spiking. Here is but one metric that makes it clear that the national debt is no free lunch: Interest expense as a percentage of tax revenue has exploded. In the first quarter of 2022, interest expenses ate up 19.3% of tax revenue. In the first quarter of this year, interest devoured 32.9% of tax revenue.
Please re-read the preceding sentences in bold.
The proposed Biden-McCarthy debt ceiling suspension still must work its way through the House and Senate. Changes are likely along the way. But regardless of whether discretionary spending is capped, or the debt rises by another $4 trillion, as some opponents insist, the bill can’t control the interest the government must pay on its debt. That is controlled by the market. And it is going higher.
It is catch-up time. A lot of free lunch bills are coming due—bills that will be paid by dollar holders. During this reckoning, we think it makes sense to protect your wealth, your family, and your retirement with gold.
If you’re interested in investing in precious metals, let us provide you with a free one-on-one consultation.
Red Rock Disclaimer
The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment or tax advice, and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.
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