US GDP in 1971 was barely over $1 trillion. Total debt was only about $1.5 trillion. Today, GDP is near $28 trillion, but much of the spending is ‘on credit' with total debt approaching $100 trillion.

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“Never allow the demands of tomorrow to interfere with the pleasure and excitement of today.” 

—The Music Man 

Suppose an entrepreneur (or counterfeiter!) sets up a bank in a small town in the Midwest. He lends everyone a lot of money on irresistible terms. Suddenly, the town comes alive... cars roll off the lots... barroom tips go up... furniture showrooms are cleaned out. And, of course, prices rise. 

Everyone feels richer. The local GDP rises. The town gets written up in Barron’s. The Wall Street Journal says it is a sign of a ‘middle-American revival.’ The mayor considers running for governor.  

Trouble begins as fun. But then, the wave of prosperity soon washes over the town... and drains away. The cash is gone. Loans have to be repaid. Sales go down. Cars and furniture are repossessed. 

What happened to the boom? What became of that new wealth?  

It was fictitious. Unreal. Transitory. Ephemeral... a chimera... a mirage... a vain and foolish fantasy. 

How could that be? The BMWs and sectionals were real, tangible things. The boom was genuine.  

But the spark was credit, not savings. Savings can be spent and enjoyed. End of story. But credit comes with ‘the demands of tomorrow’ attached. Successfully invested, it might have created new wealth. But merely consumed... there was no new income to pay off the debt. People just spent money they didn’t have…and got poorer. 

In round numbers, US GDP in 1971 was barely over $1 trillion. Total debt back then was only about $1.5 trillion. Today, GDP is around $28 trillion, but much of the spending is ‘on credit’... with total debt approaching $100 trillion.

Assuming the ratio of debt/GDP had stayed the same, we’d only have about $40 trillion of debt, not $100 trillion. That extra $60 trillion represents ‘the demands of tomorrow’ that aren’t likely to be met. It was credit flushed into the system... .but with no corresponding increase in real wealth.  

Much of the ‘wealth’ of the US economy is likewise only half of an incomplete transaction. It is the fun part of the credit cycle. Debt increases on one side of the ledger.  “Wealth” on the other.  And then, when the credit cycle completes its swing, both disappear.  Debts are paid, written off, or inflated away.  Assets are marked down. 

Today, America’s publicly-traded businesses are said to be worth $50 trillion. How much of that is real?  Take Nvidia. Business Reporter: 

Nvidia’s stock rallied to record highs on Wednesday, with the artificial intelligence chipmaker’s valuation breaching the $3 trillion mark and overtaking Apple to become the world’s second most valuable company. 

Nvidia (NVDA) is a real company. With real products. And real profits. But does it really represent $3 trillion of wealth? Unlikely. As we saw last week, at the present dividend payout rate, it will take more than 2,000 years for investors to get their money back. 

Of course, that doesn’t mean that investors won’t pay even more for the stock after it splits today. But are they really calculating the present value of Nvidia’s future earnings? Or just gambling on a higher price with cheap credit-money? 

Last week, we reported that many US companies were ‘zombies,’ unable to pay even the interest on their debt. On the stock market they may be worth billions of dollars. But what is the real value of a company that can only stay in business by borrowing more and more money? Shouldn’t the ledger list them as liabilities rather than assets? 

And how about ‘meme’ stocks? 

GameStop (GME) sells computer games from retail, brick-and-mortar stores. And like Blockbuster video rentals, its business largely disappeared when the games became available online. 

But GameStop didn’t go gently into that good night. In January 2021, as the pros sold it short, the gamers bought. This forced the shorts to cover and spiked the price from $1 to $100.  

A simple question: What kind of wealth was that... the $99 increase caused by meme stock traders? 

Then, just a couple weeks ago, the image of a man leaning forward in his chair, posted by Roaring Kitty (aka Keith Gill) appeared on X. This was thought to be a signal to the cognoscenti, causing another big up-tick in trading. 

The press reported that Gill himself was buying. Matt Levine (at Bloomberg) was on the story: 

He paid about $174.5 million for the position. This morning, GameStop’s stock got as high as $40.50, and those calls got as high as $21.10. At those prices, Gill had a paper gain of about $281 million.  

A ‘paper gain?’ What kind of wealth is that? 

We don’t know. But if we had it, we’d convert it to a non-paper gain, pronto. 

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