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The USA Inc Turnaround: Uncle Sam’s quest to climb out of a deep hole
- Simon Bennaim
- Apr 7
- 11 min read
Updated: Apr 7
At Zorea, we generally avoid discussing macroeconomic ("macro") topics. One reason is that macro is unpredictable. We intend to elaborate on this statement in a future letter, but for now, take (legendary macro investor) Stanley Druckenmiller’s word for it:
"The only good economist I have found is the stock market. People say it has predicted seven out of the last four recessions. That's still better than any economist I know.”
Second, and most importantly, we own companies that sell essential products and services, companies that are leaders within their industries, and are financially robust. These are the types of companies that tend to gain market share during economic downturns. They invest when others can’t and emerge on the other side as more valuable companies. Negative market cycles also present us with attractive bargains. Provided that the basic tenants of capitalism remain intact in the markets where we invest, we see market and economic downturns as long-term opportunities.
With that said, we consider the current events in the US; the new administration’s desire to balance the budget and to tackle the debt problem through DOGE, tariffs, and other initiatives, to be exceptionally important. It is one of those rare times when understanding what is happening at the macro level matters.
The US has a couple of large Income Statement problems that, after decades of neglect, have led to Balance Sheet problems. Mostly for the government but also at an aggregate level. These issues pose a risk to the dominant global position that the US has held since WWII, although the exact timing of any potential issue is uncertain and could be either decades or just months away. The new administration is attempting to fix these issues. We support the initiative[1], but caution that these are difficult problems to solve, and the road ahead may be a bumpy one.
Income Statement problems…
The United States Government has a serious spending problem. As illustrated in the chart below, in 2024 the US government spent 37% more than it earned[2]. Let that sync in. For every dollar the government receives, it spends $1.37. Imagine an individual with the same spending habits. Unless that person starts with a substantial and clean Balance Sheet (i.e. very wealthy), it would not be long before they would have to start borrowing money and, eventually, file for bankruptcy. The same applies for companies. There are no mature companies (to our knowledge) that have survived with this magnitude and duration of cash burn. The government gets more leeway from its creditors, but “what can't last forever, don't last forever”.
This is one of the main problems that the new administration is trying to address. As the government seeks to shore up its finances, there are no easy answers. Every dollar the government stops spending is a dollar that someone else stops receiving. People don’t like not getting paid. The reason the problem prolongs itself is not because there is disagreement about its existence, but because, politically, it is very difficult to shut off the valves.
So the government is naturally looking at the most palatable places to improve its situation. DOGE is an attempt to go after excess and abuse. Deregulation is an attempt to accelerate taxable GDP growth. Then there is trade, where (1) the US has not been treated fairly by some, and (2) the impact to the US population is real but more indirect.
From the lens of the government’s fiscal accounts, trade tariffs have two direct advantages: (1) they increase revenues, and (2) a more balanced trade account should increase US taxable GDP. Tariffs also allow the US to deal with its other Income Statement problem – the trade deficit. Running a trade deficit, as the US is doing, has a material negative impact on the country’s net worth[3]. That is not to say that balancing trade is costless[4]. There is no silver bullet and good execution is paramount. But the status quo leaves the next generation in peril.
The chart below shows the US Trade Balance as a percentage of GDP. As depicted, prior to the 1980s the US would generally run a small trade surplus. Since then, we have slowly shifted to large deficits. If the chart went further back it would show that the US ran a relatively consistent surplus since the 1870s. Those 100+ years of surplus (late 1800s to the 1980s) represent the meteoric rise of the US in the world stage. The two factors are interlinked.
Meet the Spender and Industrious families
In our experience, most people don’t intuitively grasp the issue of the trade deficit. Here is an analogy to help grasp it[5]. Suppose there are two neighboring isolated islands. The Spender family lives in one island and the Industrious family lives in the other. Both families came to their respective islands with modest savings. The islands have enough resources to produce each family’s daily food intake with about 10 hours’ worth of labor.
The Industrious family, given their work ethic, decide to work 15 hours a day. This gives them a surplus of food. Not knowing what to do with this food, they offer it to the Spender family for cheap. Initially, the Spenders offer to exchange the extra food offered by the Industrious for the straw hats that the Spenders like to make (the Spenders love crafts) but the Industrious family doesn’t want straw hats.
So the Spenders, all of whom attended Ivy Leagues before arriving on the island, perform some calculations and devise a formula to assess the value of their time. They determine that the Industrious is offering them an excellent deal. Plus, the Spenders, who received most of their savings through inheritance, are not particularly inclined to work the land. So they decide to buy the Industrious’ food surplus on the cheap. As a result of the agreement, the Spenders work five hours a day, buy half their food from Industrious, and get to enjoy their beautiful island. Welcome to the good life.
As the years go by, the Spenders’ savings start to dwindle. But the Spenders really like their lifestyle. The Industrious don’t mind working. So they reach a deal whereby instead of paying with money, the Spenders will start paying for food with IOUs. The IOUs are collateralized by sections of the Spenders’ island, because that is their only asset. As time passes, the IOUs grow in size. The Industrious family, seeing that they have enough IOUs to take control of the Spenders’ island and then some, decide that the IOUs are no longer valuable and want ownership of their collateral. The Spender family, who cannot pay for their IOUs in any other way, must agree.
“At that point, the [Spenders] are forced to deal with an ugly equation: They must now not only return to working [ten] hours a day in order to eat—they have nothing left to trade—but must also work additional hours to service their [remaining] debt and pay [the Industrious’] rent on the land so imprudently sold.” (see footnote [5])
This oversimplified analogy should help explain the problem of running a perpetual trade deficit. As will be shown in the next section, in the year 2025 the US is firmly in Spender territory, and is well into the phase of paying its trading partners with IOUs.
… leading to Balance Sheet problems
What happens when an entity consistently loses money over many years? Well, their Balance Sheet looks bad. Understanding the true Balance Sheet of the US government is not straight forward. This is because the government’s most valuable asset – its ability to tax its population – is an intangible asset not reflected in its Balance Sheet. As a result, people look at Debt to GDP as a proxy for understanding the progression of the government’s Balance Sheet. While the ratio has its limitations, we agree that its use is directionally correct[6]. The chart below, which is often quoted, shows the rapid deterioration of the US government’s Balance Sheet since the 1980’s. We are now at unprecedented levels of debt, especially when considering that we are in a period of relative peace and with a strong economy.
This level of debt, exciding 120% of GDP, probably seems abstract to most. The US government currently spends about the same amount in interest payments as in defense. That’s despite the fact that the US weighted average cost of debt is only 3.3% (source). An increase in long-term interest rates, which can be caused by a lack of trust in the US government’s ability to pay its debt in real terms[7], could be disastrous. It does not take draconian assumptions to take the US government into a ‘debt spiral’.
Moving on to the trade deficit. There is an economic metric called Net International Investment, which measures the Balance Sheet of the US relative to the world. Its specific definition is:
“The accumulated value of U.S.-owned financial assets in other countries and U.S. liabilities to residents of other countries at the end of each quarter. The difference between assets and liabilities is the U.S. net international investment position.” Source.
In simple terms, this metric calculates the difference between the US ownership of foreign assets and foreign ownership of US assets. Returning to the island analogy, it represents how much of Industrious’ island is owned by Spender, minus how much of Spender’s island is owned by Industrious.
As the chart shows, prior to the late 1980s (when the US started running deficits), the US ‘net worth’ consisted of domestic assets, plus a small portion of assets in other parts of the world. Today, the story is very different, much of our ‘island’ is increasingly owned by others. The current Net International Investment, at a negative $23.6 trillion, represents just under 10% of the estimated total assets within the US.
After having operated as the Industrious family in much of the country’s early history (up until around the 1980’s) the US is now firmly in Spender family territory and paying with a lot of IOUs. The US is currently living on its past success.
So what?
The problems we just described have persisted for quite some time. The government has been running deficits for over half a century, government debt levels have been hitting new peacetime highs for the last 20 years, and trade deficits have been a fixture of life since the 1980s. Meanwhile, US residents have enjoyed tremendous prosperity. Standards of living are as high as they have been, the stock market is near all-time highs, and the US is the best place in the world to create wealth. Why all the fuss?
The situation is relatively calm today because foreign investors have decided that it is in their best interest to keep lending money to and investing in US assets. That’s it. If or when this changes, the situation can deteriorate rapidly. Funding costs could skyrocket, which would lead to a plethora of negative outcomes. We believe this scenario could be more severe than the Great Financial Crisis; there is no one to bail out the government. No one knows if or when this will happen. It might be in a month or in a few decades. However, that is not a prudent way for the country to manage its affairs.
At Zorea, we believe in hard work, investing smartly, and thrift. Going back to our island example, the Industrious family are our type of people. We believe the US’ future will be better off if it behaves like the Industrious.
Going from over-spending to over-producing will be hard. There is no free lunch. If the government goes through with its rhetoric, lots of people getting paid today will stop getting paid. Prices will go up. There are many companies overearning today that will have to see some normalization. Pain today for the possibility of a more prosperous future.
Where does that leave us?
It is impossible to predict how this plays out. Nobody knows – not Trump, not his administration, and certainly not the pundits discussing it. The US administration has tremendous negotiating leverage externally. They also have some political leeway internally. That puts them in a good spot. But, especially with the tariffs, it seems to be taking on the world all at once, which strikes us as risky. Additionally, many world leaders have more staying power than US leaders. We see a wide range of outcomes coming out of this, from really good to really bad. What seems very likely is that there will have to be at least a period of adjustment.
As for Zorea, we manage our affairs so that we are prepared for most outcomes – especially the bad ones. We believe we have built our portfolio to withstand bad scenarios. In our view, our portfolio is composed of mostly robust businesses trading at attractive prices. As mentioned in the beginning of this letter, we believe that drawdowns can improve our results over the long-term. That’s because we expect our companies to outperform, and gain share during those periods, but also because during panics is when we can find the best bargains. We will experience drawdowns but are ok with those as long as our companies’ fundamentals stay strong.
From a risk perspective. Any risk mentioned in this letter is analyzed like any other risk. Thoroughly and at a company level. More on that in our quarterly letter coming up, but having sharpened our pencils, we think we are in a relatively good place.
We hope this has been accretive to your understanding of the US fiscal situation and the trade imbalance.
Simon Bennaim
Footnotes
[1] This is not a political statement.
[2] Here we look at deficit as % of revenues (aka Receipts). This is different than looking at deficit as % of GDP, which is the most widely used metric. We are doing so to show the P&L of the US Government. Gray bars on the chart represent recession years.
[3] More on that later.
[4] Tariffs are a tax on consumption that is inflationary. It can reduce the population’s standard of living. Tensions with partners can also have negative consequences.
[5] The inspiration of this analogy can be found here https://www.berkshirehathaway.com/letters/growing.pdf.
[6] GDP provides a sense of the country’s ‘earnings power’ and hence an idea of what the right to tax might be worth.
[7] In nominal terms the US government cannot go bankrupt as it can print money.
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