Title: Haymaker Daily — Steroids On Top Of Steroids Show: Haymaker (Substack) Author: David Hay / The Haymaker Team Date: 2026-08-27 (AUG 27, 2026) URL: https://haymaker.substack.com/p/haymaker-daily-f44 Note: Written post — no timestamps. Paid post; body captured via Stephen's logged-in session. Verbatim body below (disclosures omitted).
Hello, Haymakers:
In this week's Dailies, we've been examining the feedback loops from the federal government's inability to control its immense spending and the related record peacetime deficits. It's reasonable to conclude most Americans realize this is a totally unsustainable situation. Yet, there are also substantial near-term benefits that make it hard to kick the habit.
One of those is the rarely-discussed boost to both economic activity and, particularly corporate earnings, which result from $2 trillion-dollar annual government deficits. This impact is most obvious with the economy due to the logical conclusion that when federal red ink is running at four percent above normal — say, 6% of GDP deficits vs. a more typical 2% — this provides a significant boost to the economy. How much is the subject of intense debate. Yet even assuming only a 0.5 "multiplier effect" this would still amount to around 2% of artificial economic growth.
Corporate profits also receive a tremendous up-lift from emergency levels of U.S. government largesse. In theory, there is a one-to-one relationship, per the widely accepted Levy-Kalecki Profit Equation.
Accordingly, a $1 trillion jump in the federal deficit inflates corporate profits by a similar amount. In practice, it's more complicated, similar to the impact on GDP. This is due to the reality that there are negative offsets such as elevating trading deficits, as well as raising interest rates as surging government borrowing "crowds out" the private sector.
Another enormous economic accelerant currently is AI-related spending. This pace, too, is highly unlikely to be maintained longer term. It is also having the bizarre effect of driving up the government's borrowing costs due to the deluge of hyperscaler debt raises to fund their $700 billion plus annual expenditures on the great data center build-out. In other words, this is a reverse "crowding out". (Nvidia's second-quarter results reported yesterday indicate this AI spending boom will continue to run white hot.)
Per the following graphic from the Columbia Business School, as relayed by Luke Gromen in his August 14th newsletter, prior eras of excessive spending to finance efficiency/technological breakthroughs have never represented such a large share of GDP. This raises the reasonable question of what happens to the economy when these double doses of amphetamines inevitably fade.
Secondary Source: Luke Gromen, Forest for the Trees
A bullish rebuttal to these concerns is that the productivity boost from AI will be so mammoth that these outlays will easily pay for themselves. This may well turn out to be the case, but there is a substantial risk that returns on both the federal and AI spending will turn out to be disappointing.
Of course, the odds are that much higher excessive government spending will turn out to be a big disappointment. In that regard, the facts are undeniable that America's economic growth dramatically decelerated over the last 25 years while deficit spending has exploded. The long-term bond market is clearly beginning to sniff out the unsustainability of this situation.
The Haymaker Team