I think we can all agree that the pandemic has changed the world in many ways, some good and some bad.
The worst part of the change caused by the pandemic has been that governments worldwide have borrowed and spent recklessly, chucking all fiscal responsibility out the window.
Politician and fiduciary should never be written in the same sentence. It matters not the political party affiliation because politicians have proven time and time again not to be good stewards of the people’s money.
Critical to the issue is understanding the difference between debt and deficits.
“Deficit" refers to the yearly budget deficit, which is the mismatch between what the government takes in and what it spends. "Debt" refers to the cumulative effect of spending more than what's taken in. Oh sure, the astute politician will gaslight you all day long with the “Look, how I’ve reduced the deficit" narrative, hoping you won't notice the out-of-control cumulative debt levels. It's a sleight-of-hand trick that would make even the best magician insanely jealous.
High and rising deficits/debt mean more of the federal budget goes to financing the debt, potentially crowding out other spending.
In other words, if you cut up a dollar bill in 100 different pieces, it’s worth the same as a dollar bill that’s been cut in half; there’s just less of that dollar that a government program receives. At some point, the burden of debt will become unsustainable.
Here’s how burdensome U.S. debt has become:
At this point, it's projected to get only worse. Something has to be done. Of course, I'm not smart enough to know the answer to our debt problems; I only know that politicians should focus on tightening the belt sooner rather than later.
Very few investors relate to U.S. debt; they tend to brush it off. Investors have only one question:
With a record level of debt the U.S. carries and the heavy burden of paying interest on that debt, historically, how has that affected the performance of the stock or bond markets?
Answer: Very little
The equity markets have always been a “what have you done for me lately" place where investors can grow their capital. Many moving pieces can drive stock market returns. However, two more important pieces are corporate profits and interest rates.
If corporate profits can continue to increase (which historically they have; see below) then equity prices have room to grow:
For the past 34 years corporate profits (along with their dividend brethren) have continued to overcome any obstacle thrown in their way, increasing by an average of 8.9% per year(meanwhile dividends have increased by 6.1%/yr.).
Which equity prices, in perfect correlation with increasing profits and dividends, have had an impressive run despite our elected officials running up massive levels of debt:
Naturally, I'm not trying to view the U.S. debt problem through rose-colored glasses; I'm simply viewing it through the lens of history.
I share the same concerns about the rising debt levels that we are adding at an alarming rate in the United States. I would love to see Congress take the bull by the horns and do the right thing by getting a handle on their spending. However, I also think it's a catastrophic mistake to alter your long-term financial plan based on the level of U.S. Debt, as history has proven that it simply doesn’t matter, as much as the media would like for you to believe.
Stay the course, my friends.