This graph shows the amount of our national debt in relationship to our GDP (gross domestic product). Gross Domestic Product is, in one sense, the income for our country for a given period, usually considered annually. It is the sum of all of the value created in a year.
Because our debt as compared to our GDP is rising again, you will hear a lot about this in the weeks to come, so I wanted to make sure that you knew the TWO (2) reasons that this number or graph rises. The first is because we borrow more money, and the second is because we produce less or earn less. In either case our net worth or our total value will go down.
As a clear example, during WWII you can see that our debt to GDP increased to its highest level. It is clear that the primary reason for the increase was spending borrowed money during the war. Then, in the late 1940’s and the following three decades it declined. This was not a time that we paid off a lot of the debt; in fact, the debt did not decline in a meaningful way during that time – instead, our GDP rose. This prosperous time made the debt look small.
It is rising again and is crossing into a territory that makes credit-rating agencies nervous. You may have heard that our credit rating may decline from the AAA rating we have enjoyed since the fifties. This is primarily due to the reality of this graph. Our liquidity is declining. Our value is going down, and with it is our ability to pay our bills.
A good parallel is to compare this with our personal financial situations. If you owe more more than your income and assets combined, then you have over a 100% debt to income&assets ratio. Many reading this today will.
So what are the take-home messages for investors and for my clients?
1. When you invest, invest globally. We do not want our retirement accounts invested in just our own basket.
2. Consider that stocks as an investment are sometimes rated higher than government bonds and if diversified prudently are actually safer to own in the long run.
3. Eliminate your debt. If you have borrowed money that is not secured by your home, then make a plan and pay it off. You do not want to go into a rising inflationary time with consumer debt.
Think about it – would you rather have your retirement account values and your resulting plans for retirement subject to the management of the government? or would you rather have it in the hands of the collective genious of 12,000 or more of the world’s publically traded companies?
Neither is predictable, nor is either perfect. But if the research of the last 50 years means anything, then for my money, the safe (and very lucrative) bet is on companies where at least our motivations line up. I do well when they do well.
Don’t bet on Government. There are too many moving parts being controlled by two few individuals – not to mention that there is no evidence that government can produce anything of any long-term sustainable value, much less a profit.