“You were grumpy and aggressive,” said our better half.
“No, I was just confused.”
“You’re not that dumb.”
“Oh, yes I am.”
Yes, we are back in civilisation, with all its constraints and discontents. Well, to be more precise, we are here in Boca Raton, Florida.
It’s been interesting readjusting to the so-called real world and catching up on what we’ve missed in the interim. As a consequence of our sojourn in Argentina, we missed out on the MoneyWeek conference last Friday. Thankfully, all of the audio is now available online, so we’ve been quickly catching up on the day’s proceedings.
Meanwhile, Elizabeth needed to get her computer fixed yesterday. So we went to the Apple store in the mall. That led to a number of insights about modern materialism in the United States of America.
First, we decided to have a quick lunch at the Capital Grille. This seemed like a fair bet. It’s what Elizabeth refers to as a ‘real restaurant’. By that she means it has a real chef – or at least a cook – rather than staff who are just heating up pre-prepared, fast food meals.
“What temperature do you want your burger?” was the question that stumped us.
“Huh? What temperature? I don’t know, about 200 degrees?”
“He’s asking how you want your burger cooked,” Elizabeth quickly interpreted.
“How am I supposed to know that? And why use code words? Why not just ask me in English… or some other language for that matter? Besides, ‘temperature’ is a very specific and very objective measure, it requires a precise answer. Not something vague, like ‘well done’ or ‘juicy’.”
“Oh, you’re being a curmudgeon. Now, stop it.”
Thus are we adjusting to life in the heavily-indebted world, where people do not pay for their lunches with money; they pay with credit. The whole economy functions without real money; it has practically disappeared. Now it’s the supply and demand for credit, not money, that determines the level of inflation.
“No, this is not an independent restaurant”, the waiter informed us later. “It is owned by the Darden chain.”
Aha! A restaurant chain completely dependent on middle-class credit. Take away the credit, or merely let it shrink, and Darden – a publicly traded stock – will shrink too. No, more likely it will collapse. Because earnings depend on marginal sales, and when the marginal buyer stops eating the marginal burger at marginal family eateries like Olive Garden and the Capital Grille, the whole family-dining restaurant industry is going to look a little green. Even a small decline in marginal sales means a major decline in earnings, on which the companies’ debt service depends.
We base this guess largely on our estimation of the US consumer. He’s not hale and hearty. In fact, he looks a little peaked. Bloomberg reports that he is now being forced to dip into his retirement accounts just to make ends meet:
Early Tap of 401(k) Replaces Homes as American Piggy Bank
The Internal Revenue Service collected $5.7 billion in 2011 from penalties, meaning that Americans took out about $57 billion from retirement funds before they were supposed to.
The median size of a 401(k) is $24,400 as of March 31, with people older than 55 having $65,300, according to Fidelity Investments.
Adjusted for inflation, the government collects 37 percent more money from early-withdrawal penalties than it did in 2003. Meanwhile, the amount of home-equity loans outstanding was $704 billion in 2013, down 38 percent from the 2007 peak, according to Federal Reserve data.
Not that we’ve studied Darden in particular. We’re just guessing about the industry, in general. US corporations used record low interest rates to increase debt for various purposes – including expansion (to reach marginal customers) and share buybacks. Corporate debt has been the second most rapidly-expanding category, after government debt. Now, US businesses have high debt, supported by high earnings. The problem is that the earnings can disappear readily. Debt, well, not so fast, and not so easily.
Of course, Darden is one of thousands of businesses that depend on expanding credit. Forget an expanding money supply. Darden needs customers with credit cards, and confidence. So do other businesses depend on customers who are ready, willing, and able to increase spending. They can’t spend more earnings; real earnings are going down. That leaves only credit.
According to Richard Duncan, the US economy goes into recession every time credit growth falls below about 2%. That’s why the feds are so desperate to keep this debt machine in gear. Without it, companies such as Darden have to reckon with decisions they will wish they hadn’t made, and debt they will wish they didn’t have.