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The national debt just hit $40 trillion and rising. Seems like possible dire consequences for the markets perhaps the economy as more borrowing may raise interest rates.
’What is the general consensus on the risks we may be facing. Time to go into bonds?
As long as the people who run the show keep thinking the way to get out of debt is to cut income it is going to get exponentially worse.
I think we have caught up with Greece!
Great article. The problem is this is a PROBLEM.
I’d say no. The government will issue more bonds to cover spending. Investors will want higher yields, and that will depress bond values
To me the most important number is not the ones discussed below it is these two:
1) 1 trillion dollars- which spent annually just on financing the debt last year- think of the programs that could finance, ah like Social Security and Medicare, no future cuts would be necessary
2) 14%- the percentage of the Federal government’s “budget” that is the debt payments.
The financial news media always say remember there is an inverse relationship between interest rates and bond prices.
No, you don’t buy bonds if you think interest rates are going up. You buy them after interest rates have gone up.
Precisely.
The problem is the debt has doubled in the last 10 years, while GDP has only grown about 66% over that time. So our debt is growing faster than out economy – that is not sustainable.
In the First Report on the Public Credit dated January 9, 1790 Alexander Hamilton wrote “The creation of debt should always be accompanied with a means of extinguishment“.
As a nation the government followed Hamilton’s guidance for about 150 years.
One way to appreciate the number: a million seconds is about 11 days, a billion seconds is 32 years, and 40 trillion seconds is about 1.2 million years!
But $40 trillion by itself is probably the wrong way to frame the debt problem. The US is a very large and very wealthy country. GDP is about $32 trillion a year and household wealth is around $180 trillion. The more relevant number is debt held by the public, which is roughly 100% of GDP.
I don’t think the goal needs to be paying off the debt. We need to stop it from growing faster than the economy.
Our government currently spends about 23% of GDP and collects about 17-18%. Close that gap by 2-3% of GDP and, with economic growth, the debt becomes much more manageable.
Of course finding that 2-3% is where it gets hard. It probably requires some combination of Social Security and Medicare changes, more taxes, spending cuts, and economic growth. We can do it if we get past our divisive politics.
I agree that it is more relevant, that when comparing the debt over long time periods, we should consider the ratio of the portion of debt held by the public divided by the GDP. A big problem is the recent accelerated annual rate of increase, which needs to come back down to the rate of GDP increase. No doubt, the necessary measures will carry some pain, but it is necessary.
I think that nominal bonds are heading for trouble. Inflation protected bonds and senior floating rate loan funds may be a better choice right now.
When the number of retired people is reaches 50% of the workforce, the taxes required to balance the budget would be crushing. It’s not surprising they can’t do it, and have to rely on deficit spending.
No.
Forty trillion is a number so large that it is indeed hard to fathom, but it is no surprise that we reached that level. The debt has been rising for a long time and looks like it will continue to do so.
What to do? In my opinion, the best strategy for an investor to follow when reading the news is to stick with your asset allocation, rebalancing as warranted. My allocation was chosen, not to maximize my wealth, but rather so that when I read or hear something disturbing, I don’t need to take action. Remember the wise maxim: “Don’t just do something, stand there!”
Ah, Jack Bogle 🙏
I find it profitable to sometimes reread the classic writings of Bogle and a few others. Their words and message remain useful despite the time that has passed since they were first written.
I just read yesterday that August 31st is the 50th anniversary of the founding of Vanguard’s S and P 500 index fund originally derided as Bogle’s folly.
A few facts:
1) Allan Roth has calculated that a $15,000 investment in that first index fund at its launch is worth more than $3.6 million today.
2) Vanguard has estimated that Bogle’s pushing of index funds has saved investors 570 billion dollars.
3) Vanguard now has 12.8 TRILLION global assets under management. That is more than all but eight countries’ total household wealth.
Hmmm, quite a folly.
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