Federal Debt
36 Trillion and Rising. Federal Debt & Your Investments
A quick check on the website www.usdebtclock.org will give the current running total of the federal debt. As of this writing, that number is over 36 trillion and rising. Since we get questions from time to time regarding this topic, we wanted to cover the history of the federal debt, just who holds the debt and how we got to where we are today along with the potential impacts on your investments.
What is the Federal Debt?
This is very simple. When the Government spends more than it takes in it needs to borrow money to make up for the difference. This is a very similar concept to when a consumer buys a product on a credit card and keeps racking up purchases on that card. The money is borrowed and needs to be paid back at a later date, often times incurring interest expenses on those purchases. The same is true when the Federal Government spends more than it takes in and as it continues the process the deficit continues to rise.
History
Since the inception of the United States, there has generally always been some sort of federal deficit. Well once exception being a short period between 1835 and 1836 when President Andrew Jackson completely paid off the deficit.
The amount of debt the US has carried has often fluctuated. For example, during World War II the deficit soared but the post-war saw a sharp period of decline for about 30 years.
For a variety of factors, including the financial crisis of 2007-2008 and the Covid Pandemic, the federal debt has seen a sharp spike in the last 25 years.
Who Holds The Federal Debt
There is a misconception that our federal debt is held by foreign. While that is true to some extent most federal debt is held by government agencies such as Social Security and the Federal Reserve along with by the general public (individual as well as institutional investors). This accounts for around 80% of the total debt while foreign governments hold mostly the rest.
How This Impacts Your Investments
One misconception is that the Government running a large federal debt can have a negative impact on the stock market and your investments. This is not usually true as when the Government spends this tends to increase economic activity and thus has a positive short-term impact on the markets. This is also a big reason why administrations are not so eager to curb spending as this may reduce economic activity and thus potentially be seen as a negative in the markets.
At some point the long term the deficit will need to be addressed. Eventually interest payments will catch up and economic activity could then be slowed. How the Government eventually handles this is unknown but one potential option is a slow rate of reducing spending with a hopeful soft landing being the preferred outcome. The new administration seems to be advocating for this approach.
Conclusion
The Federal Debt on paper may seem bad but in reality, has helped spur economic growth since the inception of the country. Eventually though this new debt cycle will need to be dealt with in some form. We are monitoring how the new administration will be tackling the debt and will be staying on top of this as it relates to your investments.