The Government Won’t Cut Up Its Credit Card
At the time I’m writing this column, the U.S. Debt is just shy of 20 trillion dollars. Not 20 million. Not 20 billion. 20 TRILLION. I’ve spent my entire career in financial services, and I can barely wrap my head around that large a number. What’s worse is that the debt continues to grow at an astonishing pace. [Note: if you really want your head to spin, visit USDebtClock.org.]
So, Who “Buys” Our Debt? The U.S. Debt is “sold” to others through the use of treasury notes and bonds. Buyers of the debt include our Federal Reserve, domestic investors, and foreign investors (private individuals, and official institutions, like the World’s Central Banks). China owns a sizable amount of U.S. Debt – over a trillion dollars. Some worry that if they were to decide they want their money back, financial chaos would ensue. It’s very unlikely China would sell all the U.S. Debt they own (remember, there must be willing buyers on the other end of the transaction). They certainly could decide to reduce their purchases of our new debt, however.
Why Should We Care? Here’s the short answer. When our national debt increases, interest rates must go up to encourage investors to buy the debt. Down the road, this leads to higher tax consequences for taxpayers. Mortgages have their yields priced in relationship to what’s happening in the U.S. Government’s note and bond marketplace. Not only are mortgages affected, but other debt instruments as well. Interest rates rising at a sustained rate could have a damaging effect on the stock market, too – possibly inducing a bear market. One way or another, our national debt impacts each and every one of us!
What Can You Do? Pay attention to interest rate trends and keep an eye on our total government debt. As for your personal situation, 1. Make sure your portfolio is well-diversified with both U.S. and overseas investments; 2. Avoid letting any one equity sector dominate your portfolio (e.g., technology stocks); 3. Check the maturities of your bonds; when rates rise, longer-term bonds usually fall in value more than those with shorter terms; 4. Consider investments that don’t go down in value when rates go up (like fixed annuities); 5. Most importantly, maintain a healthy emergency fund and ample investment liquidity (don’t tie up all your money in long-term investments with large liquidation penalties). If you have questions, give my office a call!