Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your experience. Save up to 40% More details

What A Miami Stripper And Fiscal Elephant Have In Common

By Michael LebowitzMarket OverviewAug 25, 2021 06:51AM ET
What A Miami Stripper And Fiscal Elephant Have In Common
By Michael Lebowitz   |  Aug 25, 2021 06:51AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items

“Banks have conditioned us to trust them, and what have we got from that?” – Mark Baum (Steve Carell) - The Big Short.

In his book and movie, The Big Short, Michael Lewis tells the story of a few intelligent and courageous investors that saw what no one else wanted to see. Instead of turning a blind eye to absurdity, they did their homework. What they quickly found was many subprime loans were likely to default. These investors were laughed at by Wall Street’s “best and brightest” simply for betting on an obvious truth.

Myopia and fat profits clouded the ability of many investment professionals to see the housing bubble. Worse, well-educated Ph.Ds at the Fed, charged with preventing financial instability, had the same blind spot.

Now, a decade later, a much larger problem is brewing. Once again, those on Wall Street and the Fed do not see the debt elephant in the room. Maybe worse, they see it but perpetuating the problem serves their interests best.

Spotting The Elephant

In 2008 the sub-prime mortgage market crashed for several reasons. Chief of them, borrowers were ill-equipped to make mortgage payments if interest rates rose or incomes got compromised. Equally problematic, the collateral (home prices) backing the loans were grossly overvalued.

Federal debt, while vastly different than private debt, is equally unsustainable. The graph below helps quantify the fiscal problem.

Total Federal Debt And Tax Receipts
Total Federal Debt And Tax Receipts

Responsible Ways To Deal With Federal Deficits

We could write pages on the many ways the government could reduce deficits. Why bother? It is a waste of our time and yours. The answer, some combination of higher taxes and reduced spending, is a pipe dream. Politicians’ intent on holding office know higher taxes reduce the chances of reelection and showering government funds on the public wins votes.

The graph below shows over the last 50+ years, personal and corporate tax rates have trended lower. Moreover, both Democrats and Republicans have presided over lower tax rates despite increasing shortfalls between tax revenue and debt.

Personal Tax Brackets & Corporate Tax Rate
Personal Tax Brackets & Corporate Tax Rate

Enter The Magician

So, if the government intends to spend at an increasingly greater rate than tax revenue growth, a new funding source is required. Traditionally, Treasury debt funds the deficit. The problem with relying on debt is that progressively larger debt loads push interest rates higher, complicating the situation. The amount of debt that investors are willing and able to take at a reasonable cost is limited.

Enter the magician. Since 2008, the Fed has helped fund the deficit via QE. The Fed now holds nearly a quarter of all outstanding federal debt. It is as if $5 trillion of Treasury debt was never issued. The Fed also has another $3 trillion of mortgage, agency, and corporate debt.

The Fed’s combined holdings of $8.25 trillion significantly reduce the supply of debt weighing on the markets, keeping interest rates artificially low.

Fed Holdings Of US Treasury Bonds
Fed Holdings Of US Treasury Bonds

In Willful Blindness, we wrote the following:

“Currently, the government’s interest expense is less than 8% of total expenditures. That is the lowest percentage since at least 1947. Now contemplate the following:

Total Federal Debt has risen 8320% since 1966.
Federal Debt to GDP is 127%, up from 40% in 1966.
Interest expense declined by $46 billion as Treasury debt rose by over $7 trillion over the last year.”

Fed magic allows for cheap funding of deficits. What could go wrong?

Over the last 15 years, debt has grown at 7x the rate of tax receipts and over 4x more than economic growth. The divergence between federal debt and the ability to pay for it accelerated during the subprime crisis and is accelerating again due to pandemic-related multi-trillion-dollar deficits.

Are the odds of perpetually increasing the gap between spending and tax revenue any better than the Miami stripper, featured in the Big Short, making good on her loans on five houses and a condo?

While the problem is obvious, it appears the Fed, government, and just about every banker opt to ignore it. Even those who understand the problem tell the public now is not the right time to address it. Instead, there always seems to be a more pressing issue requiring more debt which perpetuates the problem.

No one wants to solve the deficit problem because the cost of fixing it involves short-term financial and economic pain. The hurt is likely too detrimental to the careers, wallets, and egos of bankers and politicians.

To answer our question comparing Uncle Sam and the Miami stripper: No, the odds are similar, but the government has a much longer runway to perpetuate its shenanigans.

The Cost Of Magic

Unlike the stripper in Miami and other overleveraged homeowners, the Fed can monetize federal debt pushing interest rates even lower. As we see in Europe, with negative interest rates, there are no limits to the madness.

The problem is the Fed’s magic comes with a cost.

For starters, savers, including a large chunk of baby boomers and retired people, must take on unacceptable levels of risk to compensate for zero interest rates on their cash.

Hey Gen X, Y, and Z don’t laugh; you pay the price too.

As we wrote in Willful Blindness:

Aggressive monetary policies funding massive fiscal spending will only widen the wealth gap and further slow economic growth, as it has done in the past. At the same time, said policies drive more people to seek shelter from the rapidly devaluing dollar. As a result, speculative investments will further dominate, leaving less capital for productive investment. Productive investments build economic growth and help everyone prosper.”

Ignoring history and logic may be expedient, but it only aggravates our societal and economic shortfalls.

For more on why the Fed’s antics to push interest rates obscenely low are damaging, our article Wicksell’s Elegant Model is worth reviewing.


The rating agencies, the banks, the government, they’re all asleep at the wheel” – Danny Moses (Rafe Spall) -The Big Short.

Michael Bury and others prospered by ignoring politicians, the media, and Wall Street. They uncovered the simple truth behind the subprime bubble. The sad fact of America’s fiscal position is just as easy to see for those willing to look.

Unlike the Big Short, our story is not as easy to time. As debt grows beyond our means, economic growth will continue to slow. The Fed will perform its magic and fill the funding gaps. But, like any Ponzi scheme, it either gets bigger, or it fails. This one will get bigger, and it will fail.

As investors, we must understand what the Fed does and take advantage of its near-term benefits to asset prices. However, while others stay asleep at the wheel thinking this is normal, we must remain prepared for the end game, whenever it may occur.

What A Miami Stripper And Fiscal Elephant Have In Common

Related Articles

What A Miami Stripper And Fiscal Elephant Have In Common

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
Sign up with Email