Structural change, fourth turning

[couragewolf]

"It's worth saying that when America says it wants to run a smaller deficit, it is simultaneously saying it wants less capital. The two things are mirror images of each other. They're saying stop putting so much money in America. It's not just operational capital it's investment capital. Now if you're European you don't only have to reduce your China risk, you have to reduce your China and America risk. This accelerates the reshoring of capital for foreign investors who previously considered America a friendly investing space."


In the minds of foreign investment firms America is making a clear standard that we want LESS foreign money in America. This has implications for Americans holding USD as a treasury, RMB holders, and gold forming a central reserve asset backing trade reserve.

WAR forces more consumption of dollars in US as a reserve which is the worst case for everyone, but not impossible.

The consensus among overseas finance professionals is rapidly consolidating and our media domestically is really not preparing people for what all this means.

 

[Experimentalist]

If you have the inclination, might you explain how a lower deficit discourages foreign investment?

Were I running a deficit in my household budget I'd spend less on discretionary things. That has no bearing on my attractiveness to someone who may wish to invest in my talents, my resources.

Economics aren't my strong suit, so your thoughts would be appreciated.

 

[star.3d]

Federal debt is not analogous to personal debt, because it doesn't get paid down/off and individuals can't engineer their debt like the govt does. But if you were running a household deficit, the businesses you patronize might suffer. The federal budget deficit isn't intrinsically problematic; it's not desirable for the federal govt to run a balanced budget. The federal govt spent $1T in the last two months alone, which is a substantial acceleration. If the government spends money, it's a form of economic stimulus, which normally begets economic growth. Foreign investors want to capitalize on that growth. This isn't a wholistic view... the government is a big spender - it spends $7T/yr and runs a shortfall ($2T), but US GDP is $30T. So there's a lot more going on in the economy. Still, a government willing to borrow money is a government that expects the economy to grow, and tax revenue to grow with it.

The federal debt, or more specifically debt to GDP ratio might be more relevant; debt is 120% of GDP right now, the same as it was in 1946. This is a level at which governments/economicies have historically become unstable (not just the US). Foreign investors tend to put money into American markets because the Fed and Treasury have historically been highly transparent and the dollar is perceived as safer than their home country. Not so right now, because of unsustainable debt burden and potentially political factors. Large foreign investors (e.g. central banks, commercial banks) have been fleeing the dollar (i.e. treasuries) for a couple years, but it's really picked up pace lately. This is driving the price of gold higher and the US dollar index (value relative to other foreign currencies) lower. If the federal government tried to pass a super austere budget - like say end ACA, medicare, medicaid, and social security - it might actually see lower tax revenues because of reduced economic activity.

 

[Experimentalist]

What you say makes sense star.3d. Less Government spending (lower deficits) would naturally have a lesser stimulative effect.

Further, your point about our ratio of debt to GDP is understood - if worrying.

However I'm still not seeing how running a smaller deficit means we want less capital.

"when America says it wants to run a smaller deficit, it is simultaneously saying it wants less capital." That's the quote I'm having difficulty with.

Thanks for taking the time to write your explanatory post, it does help.

 

[star.3d]

"when America says it wants to run a smaller deficit, it is simultaneously saying it wants less capital." That's the quote I'm having difficulty with.

Yeah - in a fiscal sense, a deficit means the Treasury is taking in capital (by issuing bonds). So in a literal sense, if they don't sell bonds, they don't take in that capital ($). But where this isn't a "mirror image" as the authors states is that the treasury pays interest on the debt and does not directly set bond yields (common misconception), or at least not right now it doesn't.* But they're not going to pay back the debt... and that's where it gets a little counterintuitive. The short answer is that the Treasury must engineer negative real interest rates ("without" collaborating with the Federal Reserve) through financial repression and inflate down the debt.

*Edit: If inflation rises, bond holders will demand higher yields - at some point, the Treasury will be unable to reign in the interest and will outright fix the bond yields through a process called yield curve control.

 

[couragewolf]

Yeah - in a fiscal sense, a deficit means the Treasury is taking in capital (by issuing bonds). So in a literal sense, if they don't sell bonds, they don't take in that capital ($). But where this isn't a "mirror image" as the authors states is that the treasury pays interest on the debt and does not directly set bond yields (common misconception), or at least not right now it doesn't.* But they're not going to pay back the debt... and that's where it gets a little counterintuitive. The short answer is that the Treasury must engineer negative real interest rates ("without" collaborating with the Federal Reserve) through financial repression and inflate down the debt.

*Edit: If inflation rises, bond holders will demand higher yields - at some point, the Treasury will be unable to reign in the interest and will outright fix the bond yields through a process called yield curve control.

The concept that bond yields even COULD be set by the treasury and the market would behave by hiking up their shorts and taking a loss rather than repatriating their own capital is a funny one.

It's novel that the economist being interviewed here says for the first time in his life he's hearing concerns that property laws in the United States might not remain reliable for foreign investors.

Anecdotal for sure, but I think yet another facet of this paradigm shift that's not an intuitive outcome.

 

[ikeo1]

It's novel that the economist being interviewed here says for the first time in his life he's hearing concerns that property laws in the United States might not remain reliable for foreign investors.

Is the thought they will force foreign investors to sell their property and disallow foreign owned property against specific countries?

If so, that would lead to less investment in the US. I guess the idea is to force them to sell, then build the factory, then have them pay rent on land they used to own. I'm sure this land will be purchased by most common people and not by PE firms that have good intentions to support the american workers.

 

[star.3d]

The Bank of Japan is usually highlighted as a recent example of yield curve control - they ended this policy in 2024. The US implemented yield curve control from 1942-1950; they capped the yields on long bonds and pegged benchmark interest rates to short-term treasuries. Do you trust the leadership to thread a needle?

Federal debt is not analogous to personal debt - I can't force the bank to accept an interest rate lower than inflation (but the Treasury can). The current head of the Treasury, Scott Bessent, previously ran a hedge fund that lost 90% of its capital in 5 years (2017-2023, under Trump 1).

As for anecdotes online, I would just say... the YouTube algorithm and all types of media make money off of your fear. Am I concerned? Of course! But a savvy investor might look for opportunities when the market is scared. Real estate, precious metals, commodities, energy and consumer staple equities are traditional inflation hedges. As for foreign real estate investors... the biggest liability, imo, is new US laws restricting it and punitive tax policies. But our president is a real estate investor... so who knows.

 

[ikeo1]

As for anecdotes online, I would just say... the YouTube algorithm and all types of media make money off of your fear. Am I concerned? Of course! But a savvy investor might look for opportunities when the market is scared. Real estate, precious metals, commodities, energy and consumer staple equities are traditional inflation hedges. As for foreign real estate investors... the biggest liability, imo, is new US laws restricting it and punitive tax policies. But our president is a real estate investor... so who knows.

I think with the looming population decline, I'm not a property investor at this point. I have some property already but won't be buying at these high prices.

I think home ownership was one of the larger ponzi style systems, where younger generations always purchased from previous generations. Now with lower child birth rates and home prices so far ahead with a population adapted to moving around, I don't think they'll buy for 30 years and stay in the same place as much. I think people will let some properties go in the future to fund their lifestyle instead or convert to assets with better returns. Real estate from here is 3-5% at most with a lot of liabilities. Even POTUS is shifting to Digital Assets which is worth nearly as much as his properties in just this term.

So, PM's, Equities, and Digital Assets and business are the only things I'm investing in at the moment.

 

[couragewolf]

The Bank of Japan is usually highlighted as a recent example of yield curve control - they ended this policy in 2024. The US implemented yield curve control from 1942-1950; they capped the yields on long bonds and pegged benchmark interest rates to short-term treasuries. Do you trust the leadership to thread a needle?

Federal debt is not analogous to personal debt - I can't force the bank to accept an interest rate lower than inflation (but the Treasury can). The current head of the Treasury, Scott Bessent, previously ran a hedge fund that lost 90% of its capital in 5 years (2017-2023, under Trump 1).

As for anecdotes online, I would just say... the YouTube algorithm and all types of media make money off of your fear. Am I concerned? Of course! But a savvy investor might look for opportunities when the market is scared. Real estate, precious metals, commodities, energy and consumer staple equities are traditional inflation hedges. As for foreign real estate investors... the biggest liability, imo, is new US laws restricting it and punitive tax policies. But our president is a real estate investor... so who knows.

I'm looking at a once in a generation opportunity personally but I believe the outlook for all the normal people I know is quite bad and most don't even see it coming.

 

[couragewolf]

I think with the looming population decline, I'm not a property investor at this point. I have some property already but won't be buying at these high prices.

I think home ownership was one of the larger ponzi style systems, where younger generations always purchased from previous generations. Now with lower child birth rates and home prices so far ahead with a population adapted to moving around, I don't think they'll buy for 30 years and stay in the same place as much. I think people will let some properties go in the future to fund their lifestyle instead or convert to assets with better returns. Real estate from here is 3-5% at most with a lot of liabilities. Even POTUS is shifting to Digital Assets which is worth nearly as much as his properties in just this term.

So, PM's, Equities, and Digital Assets and business are the only things I'm investing in at the moment.

I have mixed feelings on this.

I question whether or not private equity fills the gaps and scarcity is falsely maintained for a long time.

 

[star.3d]

I can't afford real estate and don't have a stable job, so it's kinda moot. Not applicable to everyone, but I think investing in one's own skills/employability is a solid investment right now. I don't see a lot of opportunities for entrepreneurship today, except if you're in tech/AI/ML/defense/cattle ranching (I am not) or have close connection to the administration.

For sure a lot of people are looking at crypto as the once in a lifetime opportunity ( @ikeo1), and it already has been in a way. It's not 'digital gold', but it is a collection of highly sophisticated financial instruments with relatively few legal constraints, unfair tax advantages (relative to equities), and liability for corruption (World Liberty Financial, CIC Digital). I see my own gains in crypto as fighting for scraps, potentially at the cost of destabilizing the system around me and disenfranchising lay Americans. It's about as (un)ethical as private equity, imo.

 

[ikeo1]

I can't afford real estate and don't have a stable job, so it's kinda moot.

This is the point though. What generations before us used to do, can no longer do because its no longer affordable. A house in CA is $1 million on average even condos have similar payments when you include HOA's. These days there's almost no such thing as a stable Job. IMO, there are a lot of opportunities for entrepreneurship because a lot of people are retiring AND there's a paradigm shift. You can do things cheaper faster now with the aide of AI technology, if you know how to leverage it to help you. Not directly in the AI space but implementing it in your business effectively.

For sure a lot of people are looking at crypto as the once in a lifetime opportunity ( @ikeo1), and it already has been in a way. It's not 'digital gold', but it is a collection of highly sophisticated financial instruments with relatively few legal constraints, unfair tax advantages (relative to equities), and liability for corruption (World Liberty Financial, CIC Digital). I see my own gains in crypto as fighting for scraps, potentially at the cost of destabilizing the system around me and disenfranchising lay Americans. It's about as (un)ethical as private equity, imo.

The tax advantages are the same as equities at the moment. They haven't been given favorable treatment just yet, but once these bills pass they will be and its not exactly favorable, it more like acceptance where new money can pour in. The Biden admin was heavily against this because of the volatility, but the big players needed to be brought in with their firepower, to stabilize the price action as can be seen with BTC. Since the assets are predictably limited, its a math calculation to find out how much needs to be taken out of private investor hands and into institutions so business can take it over, like PE does.

You see it as unethical, but this has been the most opportunity available for people to make real wealth gains fast and give them start up like returns and life changing money by just owning some of it. It's been affordable for years, so I look at it as an equalizer... The system is just using it the way it does to things, and paying out to the people who took the chance.

 

[star.3d]

The tax advantages are the same as equities at the moment.

I should've been more precise. Not tax, but there's no wash sale rule on crypto, for example. So not all is equal.

Edit: HAHA woah crap - I forgot the biggest tax advantage... which is income not being reported to the IRS and not paying taxes on crypto at all! (Granted, this is changing, to a degree)

 

[star.3d]

You see it as unethical, but this has been the most opportunity available for people to make real wealth gains fast and give them start up like returns and life changing money by just owning some of it.

I think there's some truth to that - and crypto is evolving. For a poor American, crypto may be 24/7 accessible from their phone - but I don't believe this is inherently good, because it promotes emotional trading.* And most Americans are already debt burdened, so they're indirectly buying crypto on margin. We could debate this, but market winners require market losers (somewhere around the world). Fundamentally, I see crypto as an financial instrument engineered to further enrich the top. This will exacerbate wealth inequality that is already a huge problem in America. We could get into where blockchain computing is being done internationally - it's not much better than buying Russian oil.

*Edit: $TRUMP comes to mind...