THE NATIONAL DEBT: AMERICA’S MOST OVERRATED CRISIS

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THE NATIONAL DEBT: AMERICA’S MOST OVERRATED CRISIS

In June, the Congressional Budget Office released its 2018 report. The story of debt and deficits it weaves, is both shocking and unrealistically pessimistic. And, even if the forecasts in the CBO report withstood scrutiny, the implications drawn from those forecasts by investors, managers, and policy-makers are flawed. They’ve turned faulty, knee-jerk reactions, which are at odds with the empirical evidence, into today’s “conventional wisdom.”

For decades, investors have been taught to fear the national debt growing to unsustainable levels and destroying the U.S. economy. Today, the debt totals more than $21 trillion! Of that total, $15 trillion is held by the public and it represents 78% of GDP.

No doubt about it, those are scary numbers. The instinctive conclusion most people reach when they hear this is “adding any additional debt is going to be the fiscal straw that breaks the camel's back.

But, this is nothing new. If we look back to 1981, the public debt of the Federal government was $1 trillion and growing rapidly. And according to many pundits and experts, the next major debacle was upon us because of the debt issues of that era.

In March 1984, Time magazine ran a cover-story titled: “That Monster Deficit: America’s Economic Black Hole.” Ironically that story appeared at a time near the beginning of the previous secular bull market which took place from 1982-to-2000. That disconnect between perception and reality reveals the problem with the simplistic theory that the next great depression is going to be created by the national debt.

Consider today’s situation. Despite the record high debt level, the net interest on the debt, which is the cost to the government to satisfy interest payment obligations, was only 1.4% of GDP in 2017. That’s near the lowest levels in the past 50 years.

One reason, net interest remains so low relative to GDP is that interest rates have been very low. So, the alarmist argument becomes, “With interest rates rising, it won't be long before interest costs spike upward, meaning the government will have to borrow just to pay the interest on the debt. When that takes place, a debt spiral like Greece faced a few years back will ensue and there isn't anyone around to bail out America’s gorilla-sized economy...

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