I saw this interview talking about the national debt which stuck with me. It was a girl who said a national debt leads to a surplus in the private sector and therefore its not a bad thing. While $36tn is unbelievably high, I believe having a strategic national debt of ~$10tn (with a balanced budget ofc) is important in order to maintain dollars in the system to hold reserve currency status. But that surplus in the private sector stuck, because does the average consumer, maybe u and me, actually feel it? Most Americans are struggling and feel squeezed, and those feeling the surplus are the asset holders (i.e the elites).
Why do they feel this? Well I'm sure overall market forces and whatnot driving fundamental performance up, but also I'd imagine its the accessibility of money and the ability for buyers to ever increasingly receive more financing, now in creative solutions, to purchase those assets. More aggressive bank lending with seemingly infinite money supplys, massive private credit and private equity and vendor financing, etc etc etc. There are 4 things which stick out to me as red flags:
1. The record level of dry powder and growth of "asset aggregation" firms despite oftentimes mediocre returns. Quite simply, there is an incredible level of cash in the system, and the fundamental inflationary backbone acting as a fire under their feet is leading tho LPs incentivized to deploy capital in order to maintain/grow value, however they face the problem of 1. only so many GP PE firms, 2. chasing only so many deals. The pressure to deploy massive amounts of cash from LPs and the limited supply of quality deals drives up the price of assets astronomically as GPs (and strategics too) compete for a limited pool of assets, driving up the price due to a massive supply-demand imbalance. This fundamentally increasss the purchase price and leads for almost no room for multiple expansion, yet PE firms essentially force this via more leverage and more aggressive "synergy realization" (firing people + working the remaining harder for very little, decreasing product quality, etc etc). This was a good strategy for several decades due to a relatively small amount of capital with syrong optionality of good deals. Now its the reverse. Now value in traditional corporate PE has been nearly maximized in the traditional spaces and record levels of dry powder in the system are still demanding deployment, so you're seeing the rise of alts and these goofy investments like sports finance, art finance, royalties finance, etc to fill that gap and will likely face the same "streamlining" as corporate buyout did. I use private markets as an example, but this goes beyond even private markets. Tuition, Housing, Cars, even things like Weddings have grown exponential in costs. Not because the consumer has growth proportionally wealthier, but because the accessibility to capital via 1. An abundance of infinite cash and 2. Flexible/creative financing have allowed the consumer the means to simply pay more (not necessarily afford more).
2. Growth of flexible financing and de-risking/liquidity solutions. I've already mentioned how banks seemingly have infinite money supply, but now specialty finance and private credit have gained huge swathes of credit market share. The ability for banks, lenders, etc to move assets off their balance sheet and push the risk onto the public has only been a thing of the last 30 years but changed underwriting incentives to be volume oriented vs risk-adverse. Even if the bank securitizations have faced regulatory scrutiny, the core principle remains that that same dollar can now be deployed dozens of times over and the public/investor base has so much capital they can fund these secondary market products. Now products like private market Secondaries and Private ABLs have simply promoted the same incentives on the private markets front. And evergreen funds/401(k) investments have unlocked even more capital needing deployment. Basically, there is so much cash in the system, lenders/GPs do not need to hold the burden of their investments failing as they can reliably assume their securitized products will be funded several times over and PE firms can rely on secondary capital to recapitalize their positions and essentially delay exiting at a loss. This almost with the previous point almost incentivizes investment into poorer quality assets as liquidity/offloading solutions can essentially de-risk you at par + servicing rights to deploy the cash again.
3. A consolidating US economy. Simply put, due to nearly 4 decades of cheap infinite capital, lower relative taxes (made up for by deficit spending i.e more cash in the system) and loosened bank/merger regulation beginning in the Carter/Reagan era and a poorly-concluded deemphasis on manufacturing, there are not as many opportunities to place money as there was before, creating even more of an imbalance in the dry powder-investable opportunities balance. And even more so, those remaining investable opportunities realize huge sums of money beyond what they should even be valued at, given that cash is still incentivized to be deployed (please tell me why Palantir is trading at 300x). Consolidation has also influenced the money supply side as well. Bank consolidation has formed banks deemed systematically important and own a meaningful share of US and even global credit markets. They can underwrite larger more agressive loans, while also now having the implicit benefit of government intervention to help subsidize losses. This was cemented with '08 policies like TARP acting as a catalyst for "bailout culture" among the banks. Simply put, Consolidation has 1. Decreased the supply of deployable opportunities available, and 2. Given systematic power to the consolidators in the sense that so much, even an excessive amount, of money is parked with them, that if they fail the government will be forced to react (usually monetarily).
Bonus - 4. Change in viewership of companies to "investments" rather than long term commitments. This is the most intuitive to the crowd so I'm not going to elaborate more unless asked.
I'm not arguing that there should be no money in the system, or that a slight excess is fine. But I guess my idea is that the massive surplus of money is causation for 1. Elevated asset prices leading to declining quality of life(?)/nonfinancial qualities being undermined 2. Increasing usage of leverage and declining credit quality of underlying assets 3. Consolidation due to a lower taxation era (historically) and loosened regulation leading to ever increasingly systematic risk onto the government (funded by taxpayers) and disproportional asset aggregation into a handful of companies.
So what's the solution? I honestly don't know. I would imagine the first step is to tighten the national debt, decrease military spending, reform welfare and remove dollars out of the system, funding by an increase in taxes which would decrease that surplus from the private sector and provide artificial redistributionist avenues for that value (or maybe just lock up that money as reserves, which a disciplined government should already do(we do not)). Elon Musk having $700bn net worth should be viewed as a systematic risk regardless of if you're a diehard capitalist. I'd imagine also government regulation and corporate trust busting occurs to detach a single company from implicit government subsidization. The added benefit of a more diversified tax base will also help regarding the nations taxation, given huge sums of value lie within Amazon, Meta, Google, etc which are notoriously efficient at minimizing taxes. The US should not write tax code based on the fear of spending habits of its top 1%, as it would lead to expensive monetary implications down the line. Companys should also fear failure again, but that won't happen if the money supply never says "no". And maybe a tightening of regulation surrounding M&A as a preventative, future-proofing measure from overconsolidation? Companies should focus on being companies and competing, not to be viewed as shareholder-optimized investments or plan to be acquired by a large conglomerate. After that idk, I remember this guy on youtube suggested maybe exploring nuetral or even strategic deflationary policies to incentivize saving? But what are peoples thoughts? Is there too much money in the system? Maybe the problem is its overly consolidated in the US Equities? If enough capital relocates they can create a network effect of liquidity into different, more inefficient markets and subsequently repricing US assets more reasonably. Maybe I made 0 sense? Idk.
