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Will We Ever Pay it Back?

Congress recently passed the latest stimulus package, the American Rescue Plan, totaling 1.9 trillion dollars. When you add this to the approximate 3.4 trillion dollar cost of the The CARES Act, the 900 billion stimulus passed in December, & the 2 trillion dollar infrastructure spending bill being proposed, the question we’re getting frequently is: “How in the world will we ever pay back this amount of borrowed money?” The short answer is we won’t pay it back – in all likelihood.

Unlike you and I, the federal government is only required to pay the interest on its debt; the principal doesn’t have a maturity date. It never really comes due. For you and me, it would be like having a perpetual, interest only mortgage. As long as we pay the monthly interest we keep on rolling. Of course, no lender would ever be willing to give us an open-end, interest only, forever mortgage.

So government debt doesn’t matter and everything is all good, right? Well, not necessarily. Even though the government controls the printing presses, there is a limit to how much debt can be realistically managed. Too much debt, with interest payments that get too high and out of control, can lead to not-so-good consequences, mainly high inflation and a declining value of the dollar. High inflation = stuff costs more. Declining value of the dollar = stuff we buy made from overseas cost more. (And we buy a lot of stuff from foreign countries. China in particular.) So, even though we have more money circulating throughout the economy, what we spend it on becomes more expensive, sometimes a LOT more expensive.

So, how much debt can the U.S. handle? Nobody really knows. The only precedent we have is the huge, massive debt taken on after WWII in order to get our economy moving in the right direction and prevent another severe depression. The heavy borrowing after WWII never really became a problem though. We were able to manage the debt load because the borrowed money was spent productively, injected back into our economy in a way that led to rapid economic expansion. This expansion made all the difference. Think about it this way: If you had debt of $50,000 and an income of $50,000 but was able to increase your income to $100,000, you could handle the debt much better. That’s what happened after WWII. A country’s economy (GDP) doesn’t equate perfectly with an individual’s expanding income, but it’s the same concept. And it’s why the runup in government debt after WWII didn’t become a problem then as many feared it would. But what about inflation? Didn’t prices rise and become a problem? Things did become more expensive, and we did have a short spike in inflation but it was short-lived. So, the hope is that a similar scenario will play out this time too. The threat of high inflation has become a topic of discussion recently. High inflation has become almost a foreign concept to us here in the U.S. It’s been a long time, since the 1970’s, that it was a problem. Why is that? There have been numerous economic forces at work that counteract inflation. The 3 big ones are:

  1. Technology – which creates massive economies of scale, especially in digital products like software, that makes lots of things less expensive to make and therefore cheaper for the consumer.

  2. Automation/Robotics – which efficiently creates more physical goods at lower prices.

  3. Globalization of labor, which sends work to lower cost regions, making goods and services less expensive.

I also think it is worth pointing out that many economists predicted rampant inflation after the stimulus that was passed during the Great Financial Crisis in 2007-2008. It didn’t happen. Money printing, as we learned, doesn’t automatically lead to inflation or automatically weaken our currency.

It seems logical to me that the massive amount of money we have borrowed for the stimulus programs will likely lead to a pickup in our economy, maybe in the same way as it did after WWII. If it does, actual inflation, or even the potential for inflation, could become a concern. How will the market react if this were to play out? Expanding economy = good for the stock market (usually). Rapid increase in inflation (or even the threat of high inflation) = typically not good for the stock market. Which of these scenario’s is more likely to play out? Let’s be clear, nobody knows for sure.

So, what do we do? The same as we’ve always done – establish a sensible long-term investment plan and position portfolios to survive a wide range of outcomes that can weather the ups and downs in our economy and the financial markets. Focus on what you can control. Why are you investing? How much risk can you stomach? If you are concerned about inflation, take the advice of Jeremy Siegel who wrote “Stocks for the Long Run.” Siegel argues that the best inflation protection is to own stocks because over the last 200 years stocks have averaged a return of more than 7% above the rate of inflation.

Bottom Line: It’s natural to try to mentally prepare ourselves for risks before they happen. Hence the saying, “prepare for the worst, hope for the best.” I take comfort in knowing that inflation is now the headline risk because it is VERY rare that everyone sees the biggest risk coming. Please do not hesitate to contact us if you want to discuss the markets, your account(s), or most importantly, your long-term plan.

- Brett


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