Welcome to our Friday mailbag edition!
Every week, we receive some great questions from your fellow readers. And every Friday, I answer as many as I can.
This week, we talk about the U.S.’ heavy debt burden… the velocity of money – and whether something fishy is going on with the government’s calculations… semiconductors… and more.
Up first, reader Deborah G. offers a possible solution to the high levels of debt in the U.S., which I wrote about in a recent mailbag edition…
I read where you recently addressed our $30 trillion national debt.
It is my understanding that the federal government holds approximately $130 trillion dollars of assets. This includes land (largest landowner in the West), buildings which could be sold and leased back if needed, etc.
Big disappointment that President Trump, being a developer and real estate expert, didn’t start selling government assets to reduce our debt while he was in office. Why isn’t this possible solution ever talked or written about?
– Deborah G.
Hi Deborah, thank you for writing in.
Yes, I did say that our government now owes nearly $31.1 trillion worth of debt. It’s possible they also own $130 trillion worth of assets as you mention, in land and similar assets.
It’s interesting that this is never discussed when considering financing any aspect of running our country or neutralizing our budget deficit. That said, I don’t see that changing anytime soon, using history as a guide.
As a result, we can expect to see our debt increase. And that’s why we can also expect to see the Federal Reserve eventually pivot from its current aggressive hiking position.
The Federal Reserve remains the largest owner of U.S. Treasury bonds, or debt. And since The Great Distortion started, the government relies on the Federal Reserve to buy that debt.
The higher interest rates go, the more expensive new debt is, and that impacts the borrowing costs of the U.S. in a negative way.
The Fed can’t keep “doing that” to the U.S. government without increasing our debt load by even more than it has already increased.
On a similar note, our next comment puts another government figure into question. Reader Thomas R. is skeptical of how the velocity of money – which I wrote about here – is calculated…
There seems to be something wrong with the way the velocity of money is calculated.
It doesn’t feel right that it has been going down continuously for years. The savings rate is not going up all the time, and spending has to be increasing, especially with the current rate of price inflation.
It all looks fishy to me!
– Thomas R.
Hi Thomas, thank you for writing in. That’s a very interesting observation you have about the velocity of money and its calculation.
The velocity of money connotes the rate at which money changes hands – all the way from where the money emanates (the Fed), to where it flows in the real economy.
And what this lower velocity of money indicates is that, right now, this money is not necessarily circling within the real economy at a high speed.
What that indicates is an unhealthy economy. People are either dumping money into the market… or paying for what they need without much to spare or save, for instance.
And what that shows is that the production of money – or the fabrication of artificial money, which is part of the Fed’s quantitative easing (QE) policy – is not making its way into the real economy.
That is one of the reasons we have such a Great Distortion between the markets and the real economy.
Switching gears… Reader Jackson O. wants to know more about semiconductors, after one of my responses in a recent mailbag edition…
Re: your reply about semiconductors, China, Taiwan, and TSMC… As I understand it, TSMC plans to shift much production to Japan as soon as possible.
It’s a mystery to me why the U.S. never brought them here??? The only thing I can think of is that the U.S. government has knowingly left TSMC alone, has strong treaties in place, and would help defend Taiwan. Taiwan is not exactly China’s Ukraine.
– Jackson O.
Thanks for writing in, Jackson. You make some interesting observations about TSMC.
It’s true that TSMC started to build a chip plant with Sony Group earlier this year.
The world’s largest contract chipmaker aims to ship products from the plant beginning in December 2024.
TSMC, Sony Group along with Denso Corp., a major Japanese auto parts maker, and the Japanese government will invest a total of $8.6 billion in the plant.
However, it’s still too early to say if management is actually planning on shifting much production to Japan.
It’s important to understand that chip factories don’t just go up overnight… Similarly, chip production doesn’t just ramp up with the flip of a switch.
At the same time, TSMC already operates a factory in Camas, Washington, as well as design centers in Austin, Texas and San Jose, California.
Plus, the company recently hosted a “topping-out” ceremony for its new fabrication plant in Phoenix, Arizona. That means the Arizona facility is TSMC’s second manufacturing site in the U.S.
TSMC operates nine plants in Taiwan, three in China and two in the U.S. Another one is in progress in Japan.
This is all to say that the company has been taking steps to expand its presence in the U.S. and other countries.
That said, it’s a good bet TSMC wants to remain as neutral as possible between the U.S. and China and to sell its chips to all. This makes economic sense.
So, as much as the U.S. cajoles TSMC to set up more plants in the U.S. for manufacturing high-end chips, I don’t see it moving much of its production over here (or elsewhere) any time soon.
Unless, of course, the China-Taiwan situation really deteriorates.
Finally, mailbag regular Paul B. has a follow-up question, also on China-Taiwan tensions and what it means for chip companies…
Thank you for your response to my questions and your insight into the potential for a blockade of Taiwan by China. I agree with you.
As a follow up, my main concern is that China, if it takes control of Taiwan, could easily forbid TSMC to sell chips to Nvidia the same way the Biden administration is now forbidding Nvidia to sell its chips to China.
Do you know what other U.S. company has a major relationship with TSMC besides Nvidia and Apple? Thank you for sharing your knowledge.
– Paul B.
Hi Paul, thanks for following up.
First off, I don’t believe China will unilaterally attack Taiwan, because it doesn’t want to deal with the same kind of pain inflicted on Russia for attacking Ukraine.
However, if this were to happen, you’re right… China could easily ban TSMC from selling chips to U.S companies the same way the U.S. government told Nvidia to stop selling chips in China (and Russia).
This may not make economic sense, but it would be a big blow to the U.S. tech giants. And, by extension, to the U.S. stock market and the economy.
For China, the ends might well justify the means, as the Machiavellian mindset teaches. But, again, I don’t see it as likely…
And even if it did happen, it’s a good bet that mainland Chinese businesses that already have business dealings in Taiwan would push for business as usual… trying to cause as little disruption as possible to an already well-oiled machine.
Unless war breaks out between China and Taiwan… Then all bets are off.
But in the end, China wouldn’t invade Taiwan just to trigger supply chain disruptions.
Keep in mind that China provides a lot of the rare earth elements used to manufacture chips. So, if it really wanted to cause supply disruptions, it would have already done so.
As for your question about U.S. companies’ relationships with TSMC…
While some U.S. firms (think Intel or Micron Technology) still manufacture chips here, other tech companies rely on TSMC to make their chips. In addition to Nvidia and Apple, that includes companies like Qualcomm, AMD, Amazon, and Google.
According to estimates, these companies count on Taiwanese manufacturers to produce up to 90% of their chips. Needless to say, it will be a challenging and long journey for them to diversify away.
Now, I can’t give personalized advice. But in general, to me, the best way to invest around potential disruptions in Asia would be to take long positions in U.S. semiconductor companies, such as Intel (INTC).
But it’s important to understand that chip production doesn’t just ramp up overnight. So this would be a long-term investment.
Similarly, anyone interested in this can look into rare earths and other types of similar commodities, as we’ve suggested in the past.
Think commodities that the U.S. and its allies would look to source outside of China, for economic and geo-political reasons.
And that’s it for this week’s mailbag! Thanks again to everyone who wrote in.
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.
I do my best to respond to as many of your questions and comments as I can. Just remember, I can’t give personal investment advice.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].
Happy investing… and have a fantastic weekend!
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins