Growing National Debt?

[Sajimone]

I'm not smart enough to understand what the ultimate repercussions are for this growing national debt and ultimately how do we prepare ourselves from an investment standpoint?   Obviously not sustainable and no one is really discussing this major issue.  I don't foresee any major reform to medicare and social security?    Politically we seem to care more about the Trump/Clinton's private affairs?   Any thoughts?  Is there something to learn from other countries that have defaulted on their debts and can those lessons be applied here?

[East coast]

I don't think people discuss it because it's not really a problem - just a nice sound bite for politicians to rail against.

[Allonblack]

As a ratio to GDP it's actually not bad by historical standards or compared to other countries. There are much bigger concerns ... for example you're probably way less worried about a mass solar flare knocking out all electronic devices than you should be. https://en.m.wikipedia.org/wiki/Solar_storm_of_1859

[The White Coat Investor]

The repercussion is inflation. That's how the debt is paid.

[ShahMD]

So WC, if we use inflation to pay off our debts and we are invested in stock market indexes...do those adjust accordingly? Thanks in advance.

[Sergio Estavillo]

Approximately 14% of tax revenues are spent on servicing interest on federal debt.  As debt and/or interest rates increase, so does the interest payment.

[Zaphod]

No one talks about it? Too many people focus on it as if its the most important thing in the world, while purposefully misrepresenting it and what it means. The risk is inflation, and since countries cant really default (at least those like the US), it is an end point with similar implications. Anyone saying that either doesnt understand the US position as a contingent currency issuer or knows that the listener is even less likely too and can thus use rhetoric for their political goal.

Yes, you should take your debts into consideration on an inflation adjusted basis, it can help you put money to its best use.

[The White Coat Investor]

ShahMD wrote:

So WC, if we use inflation to pay off our debts and we are invested in stock market indexes…do those adjust accordingly? Thanks in advance.

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No guarantee, especially in the short term, but over time, yes, stocks generally keep up with inflation.

[jfoxcpacfp]

The White Coat Investor wrote:

ShahMD wrote:

So WC, if we use inflation to pay off our debts and we are invested in stock market indexes…do those adjust accordingly? Thanks in advance.

Click to expand…

No guarantee, especially in the short term, but over time, yes, stocks generally keep up with inflation.

Click to expand...

Actually, over the long term and ever since Hamilton became our first Secretary of the Treasury, a well-diversified equity portfolio has always outstripped inflation.

[jfoxcpacfp]

The White Coat Investor wrote:

ShahMD wrote:

So WC, if we use inflation to pay off our debts and we are invested in stock market indexes…do those adjust accordingly? Thanks in advance.

Click to expand…

No guarantee, especially in the short term, but over time, yes, stocks generally keep up with inflation.

Click to expand...

Actually, over the long term and ever since Hamilton became our first Secretary of the Treasury, a well-diversified equity portfolio has always outstripped inflation.

[Sneezy]

The White Coat Investor wrote:

The repercussion is inflation. That’s how the debt is paid.

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I am not so sure about this anymore

As shown in the original post, our debt is shooting up and inflation is way below 2%.  Japan has a national debt equal to 2x GDP and barely any inflation

It is possible something has changed about this relationship that we don't really understand.

I still keep 15% of my portfolio in inflation indexed bonds  

[Zaphod]

Rex wrote:

I think you are taking him too literally.

 

the US could just print money to pay off the debt.  If it did this inflation likely would occur.

 

the US doesn’t have to do this and might not do it bc of other concerns.

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Yes, he wasnt saying it was the direct causal thing that is guaranteed to happen, it is just the risk supposedly if one does so because it has occurred in the past and basic economic theory predicts it. Its why many Fed governors are so concerned about raising rates when real rates are negative, they have a very real fear (doesnt mean it will happen) of inflation getting out of hand. However, to make up for the near decade we've spent below target we could run hot for literally years to just breakeven.

The US could really just move some excel cells around and the debt would vanish, its a strange concept and why so many people struggle to understand the basics of monetary policy at the macro level. I'd say theres a lot we dont understand, its very complex.

Everyone has a wild fear of deflation, and while its very hard especially for governments and their debts, a very low but positive inflation rate seems pretty great for the average person. Predictability brings a sense of stability.

[TheGipper]

Put me in the column that the risk of exponentially increasing national debt is far, far understated.

When I see a continued trend of a higher and higher percentage of tax revenue going to service interest on the debt rather than updating infrastructure, lower taxes, improving the solvency of Medicare or SS, or modernizing our military, it does scare me.

How would you feel if the day came where 50% of your personal income went to interest payments on debt rather than building net worth. The US is closer to that day than we want to admit.

I think it is naive to believe that people will always and without question have confidence buying US Treasury bonds.

I hope I'm wrong, but I think people may look back on that vote in the mid 90s in which a balanced budget ament failed to reach 60 votes in the senate by a single vote, as a major turning point for our nation.

Now despite the doom and gloom, I don't think this should affect one's personal investment approach in the short run, nor do I claim to be smart enough to know how to best defensively invest, even if I were told in advance when/if the crisis would hit.

[Zaphod]

TheGipper wrote:

Put me in the column that the risk of exponentially increasing national debt is far, far understated.

When I see a continued trend of a higher and higher percentage of tax revenue going to service interest on the debt rather than updating infrastructure, lower taxes, improving the solvency of Medicare or SS, or modernizing our military, it does scare me.

How would you feel if the day came where 50% of your personal income went to interest payments on debt rather than building net worth. The US is closer to that day than we want to admit.

I think it is naive to believe that people will always and without question have confidence buying US Treasury bonds.

I hope I’m wrong, but I think people may look back on that vote in the mid 90s in which a balanced budget ament failed to reach 60 votes in the senate by a single vote, as a major turning point for our nation.

Now despite the doom and gloom, I don’t think this should affect one’s personal investment approach in the short run, nor do I claim to be smart enough to know how to best defensively invest, even if I were told in advance when/if the crisis would hit.

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Luckily you are wrong. Nominal debt value is not as important as debt service payments, and luckily those are actually really low. The fed is also fully in control of the rate they pay as well, they could continue rolling it to shorter term notes instead of the longer and even decrease it. Payments made to revenue received continues to trend down, to some of the better ratios in history. Net interest payments are the same they were 20 years ago, even though GDP is 2.3 times higher. I dont know where you're getting the higher percentage of tax reciepts since that keeps climbing and the service requirement is basically a flat line for several years. Even a tiny bump in quarterly GDP more than crushes a whole years worth of debt service requirements.

This is not to say that debt can not be a problem, just that there is no need to make it something it isnt and focus on the right issues. They had much higher ratios post WW2 and it worked out fine. Anyone interested in how debt, deficits, etc... and the monetary system works can check out the pragmatic capitalism blog for some great and quick breakdowns of things.

[Kamban]

I have not problem with national debt as long as it is manageable and the interest payments on it do not eat a big chunk of our annual budget. What I am concerned about is the don't care attitude, one party blaming others for its growth if they are in opposition but ignoring it when they are in power.

If the debt is low, the interest payments is low and the money can be used elsewhere. But most likely it will go into pork projects.