Into the Fire

‘It’s a cold, cold world we’re livin’ in.’

–Nicole Scherzinger

The pieces are jumbling into place.

With yesterday’s election, New Yorkers try to escape one toxic fantasy by plunging headfirst into another. They jump from the caldarium — a muscled-up fantasy of sanctions, tariffs and warships. And they sink into the frigidarium of sensitive socialist claptrap, rent control and government-run supermarkets.

Supporting both left and right, however, is the fantasy of ‘growth.’ It will reduce the burden of debt, they say. It will create jobs. It will keep the USA as Number One. Blah…blah…

It won’t happen. Since the feds began aggressively ‘stimulating’ the economy with lower interest rates and more (fake) money, for example, real growth rates have gone down. From over 6% in the ‘60s…to around 3% in the ‘90s, the latest reading is only 1.6%, annualized, for the first half of this year.

So, the first question for policymakers might be: Why keep doing it? Why keep flooding the economy with cheap money when it does nothing to help Main Street America?

What a naïve question! But we forgive you for asking. You believe our leaders have good intentions. Good for you. But it’s a cold, cold world we’re livin’ in.

And the people who control the government — and in particular, the Fed — are interested in the Wall Street economy, not the Main Street economy. The former is where the rich and powerful make their wealth. The latter — hour by hour, week by week, sweat by strain — is where ‘The People’ earn their money and spend it.

Like a bloated corpse, the ‘wealth effects’ doctrine surfaced in the late ‘80s. Lowering interest rates, the Fed could give owners the impression that they were richer. This would induce them to spend more.

No evidence was ever produced for this phenomenon. A study of the housing market showed that declining prices didn’t change consumer habits.

But there is little doubt that a real increase in wealth will cause people to step up spending…at least to a point. So, like ‘trickle down’ economics and the Phillips Curve, ‘wealth effects’ were good enough for government work.

Our guess for today is that it has had an opposite effect. A poverty effect.

As paltry as current GDP growth is, for example, much of it is derived from spending on the AI bubble. David Stockman:

During the first half of 2025, real GDP grew at only a 1.6% per annum rate, but nearly 80% of that gain was due to the massively inflated spending on data centers and chips for the AI frenzy.

Even that probably overstates the REAL GDP gain. Our ace fund manager, Chris Mayer, sends this surprising note:

“The US economy has grown by $20 trillion since 2000, to $29 trillion last year. About $7.7 trillion of that — or 36% of all the growth in GDP — is spending related to recovering from or preparing for disasters,” according to Bloomberg Intelligence.

In other words, it’s not ‘growth’ at all.

But wait.

The dollar is only worth half as much as it was in 1999 — officially. GDP rose from around $10 trillion in 2000 to $30 trillion today. So, our GDP is only worth about $15 trillion in 1999 terms.

Measured in gold, the story takes an even darker turn. Instead of being worth 38 billion ounces of gold, today’s economy is worth only 7.5 billion ounces — less than a quarter as much.

What that means, we’re not sure. Gold may be over-priced. Or not. But there’s more.

Suppose you are planning to buy a new house next year. But along comes the Fed with reduced mortgage rates. You take advantage of the lower rates. The purchase is added to GDP. But you have not really increased GDP…you have simply drawn on next year’s GDP.

Now look at this:

Americans losing grip on debt as delinquencies surge and borrowing costs bite

Rising delinquencies in auto, credit card, and student Household debt climbed to a record $18.4 trillion in the second quarter of 2025, according to the Federal Reserve Bank of New York, while the nation’s gross federal debt hit $38 trillion for the first time. The figures highlight mounting strain across every layer of the U.S. economy — from Washington’s balance sheet to families’ credit card bills.

Let’s see, in 1999 household debt combined with US government debt was only about $10 trillion.

Now, it is $56 trillion. That means that $46 trillion of GDP was bought on credit. Yes, there were houses, cars and vacations — all delivered. But they weren’t paid for. The debt is still outstanding. Which means, when you net out the debt, the value of these purchases is zero. Real GDP happens when money is earned…not when it is spent.

What the real GDP number is, we don’t know. But it is surely a lot lower than we think.