Does our national debt matter when investing?

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Does our national debt matter when investing?

Postby DJM » Mon Dec 10, 2012 8:52 am

I know we are supposed to stay the course, and to have an appropriate asset allocation based on our risk tolerance, goals, etc.

BUT...at what point do we start to be concerned about the national debt?

Do we start to worry when the debt reaches 20 trillion, 30 trillion.....?

I don't have very big portfolio, but was wondering what you experienced, knowledgeable investors think about all of this. I know we are supposed to turn of the news and the financial shows, and not fall for the hype, but was wondering how much our national debt is supposed to affect out decisions on investing, if at all.

I'm not being political at all, just wanted to hear some thoughts.

Thanks.
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Re: Does our national debt matter when investing?

Postby livesoft » Mon Dec 10, 2012 8:55 am

It hasn't mattered in the last 50 years, so I am not sure why it should matter now.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Does our national debt matter when investing?

Postby NYBoglehead » Mon Dec 10, 2012 8:57 am

There is nothing you can do about it. While there is evidence that as our indebtedness grows, the prospects for robust growth diminish, but I'm not sure how one would make investment adjustments off of that info.
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Re: Does our national debt matter when investing?

Postby Grt2bOutdoors » Mon Dec 10, 2012 8:58 am

The world hasn't stopped turning in the time I've been around. During that time, we've had military conflicts, wars, famines, feasts, natural disasters, discovery of some very horrible diseases - and yet, the markets have risen and fallen much like you and I taking a breath of air - it ebbs and flows, yet it never stops. One day perhaps, we might stop, but then there will be someone else to take up the torch. So no, it' doesn't matter - all that matters is productivity continue.
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Re: Does our national debt matter when investing?

Postby Call_Me_Op » Mon Dec 10, 2012 9:12 am

First of all, you can watch all of the news and financial shows you want. Just be careful how you react to them.

What you are really asking is how can you insure your portfolio against the possibility of hyper-inflation. Historically, gold has been the answer - but you may pay a very high price for this insurance.
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Re: Does our national debt matter when investing?

Postby HomerJ » Mon Dec 10, 2012 9:24 am

(1) The new debt we're taking on is the cheapest in the history of the world... Yes, we owe $16 trillion or so, but our actual debt payments as a pecentage of our GDP are lower than in the past. I mean, we are getting people to loan us money at NEGATIVE real interest rates.

(2) If you want to guard against anything, guard against inflation. Inflation is the easiest way out of a debt problem. $30 trillion in 2030 dollars may be the same as $15 trillion in today's dollars. So even if we hit $30 trillion, it might actually be a decrease in debt. So maybe own 5% in gold and silver, and some of your bonds should be I-bonds and TIPs, I guess..... I have yet to invest in a TIPs fund, although I guess I should. I do think steady inflation is the government's "get out of debt free" card.
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Re: Does our national debt matter when investing?

Postby nisiprius » Mon Dec 10, 2012 9:36 am

No. It is just another macroeconomic factor to crank into the economics forecasts that you should then ignore.

Here are three reasons to ignore it.

First, what matters is not the size of the national debt in absolute terms, it is whether the national debt is too high, too low, or about right.

Second, it is going to be hard to find objective and unbiased judgements of this, because it is a highly politicized topic. Debt spent on anything a politician wants is virtuous and will be more than paid back instantly in wonderfulness; debt spent on anything the same politician doesn't want is an evil burden that will crush our great-grandchildren and cause an asteroid to collide with the Earth.

Third, there is always some meme spreading like a fad that sounds like a good reason to revamp your whole portfolio. You have to decide whether you're going to stay the course or not. If our national debt seems like a good reason to "do something" now, there is always going to be a good reason to "do something" and you will always be "doing something."
Last edited by nisiprius on Mon Dec 10, 2012 4:05 pm, edited 2 times in total.
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Re: Does our national debt matter when investing?

Postby STC » Mon Dec 10, 2012 9:38 am

TIPs are negative out to all but the longest durations. So inflation is keeping out real interest payments negative. That doesn't sound like a problem to me...
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Re: Does our national debt matter when investing?

Postby hazlitt777 » Mon Dec 10, 2012 10:25 am

DJM wrote:I know we are supposed to stay the course, and to have an appropriate asset allocation based on our risk tolerance, goals, etc.

BUT...at what point do we start to be concerned about the national debt?

Do we start to worry when the debt reaches 20 trillion, 30 trillion.....?

I don't have very big portfolio, but was wondering what you experienced, knowledgeable investors think about all of this. I know we are supposed to turn of the news and the financial shows, and not fall for the hype, but was wondering how much our national debt is supposed to affect out decisions on investing, if at all.

I'm not being political at all, just wanted to hear some thoughts.

Thanks.


Qua investor (not qua active voting citizen) one must stay the course. Be broadly diversified and rebalance. What other option is there? I suppose one could try to time when to completely get out of treasuries or other dollar denominated bonds. But such timing is very difficult to implement and few professional investors are successful in this, and then only occasionally. And one must remember that those what are owed this debt can remain "irrational longer than we can remain solvent." We never know when this debt will hit the tipping point and be dumped. So the problem of the vast debt does not undermind these Bogelian philosophic axioms.

Yes, the vast debt is serious and when we take into regard the over 86 trillion unfunded liabilities, it is even more concerning. [political comments here and later in post deleted by admin alex]

Despite all this, I stay diversified, and hold bonds and cash. However, for true broad diversification I include gold bullion directly held, not just the more common stock and bond portfolio. Gold is a financial asset that is no one else's liability. (And if held directly, then it is even a diversification away from having 100% paper assets like stocks and bonds. That is, you have more than a legal connection to it, you physically possess it.) This contrasts with the dollar and bonds which are somebody else's liability, and those that owe the money may fail to be true to their obligation, leaving them worthless or nearly.

Other than that, stay diversified. Don't try to time the bond market...or any other for that matter.
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Re: Does our national debt matter when investing?

Postby sscritic » Mon Dec 10, 2012 10:30 am

You base your allocation on your risk as you see it. If you see either the level or growth rate of the national debt as risk factors, include them in your risk assessment. I see national debt as a very small part of the risks I face.
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Re: Does our national debt matter when investing?

Postby rmelvey » Mon Dec 10, 2012 1:35 pm

Also, the US borrows money in its own currency. This means that there is absolutely no solvency risks. The US government can make any payment at any time that is denominated in dollars. Fears of an outright default are just not realistic.

If the government does spend too much there can be inflationary consequences. But if you have some gold or commodities you should be fine.

The media really likes to distort this one. We are not Greece.
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Re: Does our national debt matter when investing?

Postby Jack » Mon Dec 10, 2012 3:43 pm

hazlitt777 wrote:Yes, the vast debt is serious and when we take into regard the over 86 trillion unfunded liabilities, it is even more concerning.

How about some context. This is a 75-year projection, at the end of which most of us will be long dead. It is about as frightening as telling your newborn child that they they need to save $1 million over the next 75 years in order to retire comfortably, which is to say, not very frightening at all if they work and save responsibly.

Meanwhile, the GDP projection for this same period will be roughly 1500 trillion dollars. Can we afford 86 out of 1500 trillion? Are you still concerned?
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Re: Does our national debt matter when investing?

Postby Sunny Sarkar » Mon Dec 10, 2012 3:52 pm

Does our national debt matter when investing?


It does matter and it doesn't. It matters because the national debt is a part of the complex macro-economic scenery that affects my investment returns, and it doesn't matter because I'd file it under systematic risk that I can't do anything about as an individual investor.
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Re: Does our national debt matter when investing?

Postby ruralavalon » Mon Dec 10, 2012 4:02 pm

DJM wrote: . . . . . I know we are supposed to turn of the news and the financial shows, and not fall for the hype, but was wondering how much our national debt is supposed to affect out decisions on investing, if at all.

I'm not being political at all, just wanted to hear some thoughts.

I can not personally control the national debt. So, for investing decisions, I concentrate on what I can control or influence, like: (1) investing costs; (2) tax efficiency; (3) diversification; (4) withdrawal rate; and (5) overall asset allocation. My decisions on these areas are not affected at all by the national debt.

But still I can't say that I don't worry about the national debt.
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Re: Does our national debt matter when investing?

Postby DaveS » Mon Dec 10, 2012 4:06 pm

The discussable subject on this site is how you might allocate in light of the debt. Since a lot of debt tends to weaken a currency, I use the debts existence to justify a 50/50 US international/emerging allocation. Others less concerned about the debt allocate a lower portion to securities denominated in non US currency. Dave
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Re: Does our national debt matter when investing?

Postby scone » Mon Dec 10, 2012 4:10 pm

Debt as a percentage of GDP was far worse during and after WWII. We survived that, we'll survive this. As Winston Churchill said, “You can always count on Americans to do the right thing - after they've tried everything else.”

http://en.wikipedia.org/wiki/History_of ... ublic_debt
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Re: Does our national debt matter when investing?

Postby johnep » Mon Dec 10, 2012 4:43 pm

I am no expert in this area but at some point the debt will matter. For example, when other nations decide to reduce or stop buying US debt I believe we will have a big problem. I am not sure what the consequences of that would be, but possibilities would be higher interest rates, weakened dollar, inflation and others. However, it is hard to predict when or if that occurs. IMO, a well diversified portfolio is best strategy for investors.
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Re: Does our national debt matter when investing?

Postby Frugal Al » Mon Dec 10, 2012 5:35 pm

Jack wrote: It is about as frightening as telling your newborn child that they they need to save $1 million over the next 75 years in order to retire comfortably, which is to say, not very frightening at all if they work and save responsibly.

Of course it matters. As far as the argument goes that the debt has been high in the past, that's correct. However, it was higher because of non systemic economic reasons, i.e., there was an end to the spending in sight. The debt we have now is being cooked into the mix. At some point something will have to give. Only time will tell what that will be, but it will probably be inflation at some point. Plan for it, stay the course.

Jack, the numbers you're using are so "yesterday." The newborn is going to have to do much better than that.
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Re: Does our national debt matter when investing?

Postby SamB » Mon Dec 10, 2012 5:50 pm

scone wrote:Debt as a percentage of GDP was far worse during and after WWII. We survived that, we'll survive this. As Winston Churchill said, “You can always count on Americans to do the right thing - after they've tried everything else.”

http://en.wikipedia.org/wiki/History_of ... ublic_debt


The comparison here is for "public" debt. It will be far more interesting to see how the "non-public" debt plays out in addition to the long-term present value mismatch between entitlement in-flow and payouts. This will figure directly into your retirement planning, because it affects retirement incomes. These issues were not present after WWII. The public debt, as you point out, is not a big issue relative to GDP.
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Re: Does our national debt matter when investing?

Postby Clearly_Irrational » Mon Dec 10, 2012 6:06 pm

Basically no. The deficit matters a lot, but the debt itself is mostly irrelevant.

[economic policy comment / link removed by admin LadyGeek]

The constraint on a fiat money system is inflation not debt since currency can be created with the stroke of a pen (or a the click of a keyboard nowadays).
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Re: Does our national debt matter when investing?

Postby larryswedroe » Mon Dec 10, 2012 7:45 pm

fwiw IMO it matters a great deal as it increases the risk of inflation and also greatly increases the risk of slower economic growth--lowering future returns to stocks

Those factors should be taken into account as you build your portfolios

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Re: Does our national debt matter when investing?

Postby steadyeddy » Mon Dec 10, 2012 8:39 pm

Individual investors simply can't worry about sovereign debt or fiat currency. There are way too many moving parts to model, and you can't see most of those parts, let alone move them.

If you're running BlackRock, Allianz, or one of the larger sovereign wealth funds you can worry about these things. And lucky you, you'll probably also have access to fiddle with some of the moving parts. :wink:
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Re: Does our national debt matter when investing?

Postby sunspotzsz » Mon Dec 10, 2012 8:56 pm

[Political comment removed by admin LadyGeek]
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Re: Does our national debt matter when investing?

Postby Clearly_Irrational » Mon Dec 10, 2012 9:03 pm

larryswedroe wrote:fwiw IMO it matters a great deal as it increases the risk of inflation


The debt doesn't create inflation (assuming it's denominated in dollars) only an excessive deficit. The deficit needs to equal the growth in real wealth + net increase in savings + trade deficit just to avoid deflation. Of course that's only the vertical money side of the house. On the horizontal money side the Fed is furiously trying to create inflation in order to offset the massive de-leveraging of the private sector.

Now, if our debt were denominated in a foreign currency or we switched back to the gold standard, that would be a totally different story.
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Re: Does our national debt matter when investing?

Postby wshang » Mon Dec 10, 2012 9:41 pm

Frugal Al wrote:Of course it matters.

The policies of this forum against discussing economic policy and politics exist to ensure harmony. It doesn't mean for a second that the elephant in the room doesn't exist. An Ivy League professor emeritus friend last week, laughed when telling me there simply was no other politically acceptable method down through the ages except to inflate away the deficit.

Consider what this means for your investments:
1) Bond holders are being squeezed, artificially lower yields. Who benefits? What are you going to do? Take more risk? Go out on the yield curve? More corporates? International bonds? Dividend paying stocks?
2) Stock/Equity. We are being pushed, shoved and prodded to increase our equity allocation. When the unemployment rate drops, money pumped out to prop up (recapitalize) the banks suddenly whips up the money in circulation = inflation.
3) Low rates. So we should go out and take out loans, home equity, car loans, and attempt to hold out long enough to pay back those dollars with depreciated ones? Do owners of capital or owners of human capital benefit in an inflationary environment?
4) We often talk about staying the course, maintain an asset allocation. How does the national debt to GDP ratio affect one's personal AA? As a thought experiment, think how you might invest differently if we were on a gold standard, if the Fed did not have a twin mandate.

The oft read disclaimer "Past performance does not guarantee future returns" might also apply to mean the US cannot defy the laws of economic history. Every one of us needs to think carefully about the issues which are forbidden.
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Re: Does our national debt matter when investing?

Postby wshang » Mon Dec 10, 2012 9:45 pm

Sunny Sarkar wrote:it doesn't matter because I'd file it under systematic risk that I can't do anything about as an individual investor.

Is this a universally true statement or one which is true for an index investor? I think this is an interesting question.
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Re: Does our national debt matter when investing?

Postby hazlitt777 » Mon Dec 10, 2012 10:18 pm

wshang wrote:
Sunny Sarkar wrote:it doesn't matter because I'd file it under systematic risk that I can't do anything about as an individual investor.

Is this a universally true statement or one which is true for an index investor? I think this is an interesting question.


I haven't given thought to systemic vs. non systemic risk for a while...but it seems to me that national debt, how big it gets, whether it gets solved, etc. is a nonsystemic risk. Afterall, it is not really predictable. Even if the cynic within us believes it will never get resolved, we don't know how fast it will be grown, how long interest rates will remain low etc. Somebody correct me on that if I am wrong.

But whether it is systemic or nonsystemic, can we do anything about it other than be diversified and rebalance? So maybe the issue is just academic on that level.
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Re: Does our national debt matter when investing?

Postby hazlitt777 » Mon Dec 10, 2012 10:28 pm

steadyeddy wrote:Individual investors simply can't worry about sovereign debt or fiat currency. There are way too many moving parts to model, and you can't see most of those parts, let alone move them.

If you're running BlackRock, Allianz, or one of the larger sovereign wealth funds you can worry about these things. And lucky you, you'll probably also have access to fiddle with some of the moving parts. :wink:


I don't know about that...if by "worry" you mean "plan." If we can at least preserve something of our real wealth so as to have time to adapt to any new situations, that has value in itself too. Even if retirement becomes a dream of the past for some of us, there is value in diversifying and investing in a manner that takes into regard inflation and its root causes...sovereign debt, so as to maximize growth or at least wealth preservation.

It shouldn't just be left to the big "wealth funds." After all, we know that diversification combined with indexing and rebalancing outperforms 85% of actively managed portfolios...if I remember Mr. Bogle's thoughts from his book, Common Sense on Mutual Funds. So we should be able to do it as well or better than them.
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Re: Does our national debt matter when investing?

Postby nisiprius » Mon Dec 10, 2012 10:39 pm

Inflation has been moderate and steady for several decades now. Not only has it not increased despite many years of deficit, it was not particularly low during the years of surplus.

In real life, things just don't work the way simplistic theories say they ought to. That's the problem with using broad-brush newspaper-headline macroeconomic considerations in trying to make predictions to guide ones' investments.
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Re: Does our national debt matter when investing?

Postby hazlitt777 » Mon Dec 10, 2012 10:40 pm

Clearly_Irrational wrote:
larryswedroe wrote:fwiw IMO it matters a great deal as it increases the risk of inflation


The debt doesn't create inflation (assuming it's denominated in dollars) only an excessive deficit. The deficit needs to equal the growth in real wealth + net increase in savings + trade deficit just to avoid deflation. Of course that's only the vertical money side of the house. On the horizontal money side the Fed is furiously trying to create inflation in order to offset the massive de-leveraging of the private sector.

Now, if our debt were denominated in a foreign currency or we switched back to the gold standard, that would be a totally different story.


In regard to creating inflation, a lot of us would love to see falling prices, the creation of deflation instead. That would be comparable to rising wages. And wouldn't such falling prices help turn the economy around?

By increasing the money supply, which is monetary inflation, we lay the groundwork for price inflation, which is its potential effect. Another more hidden effect is that prices, which instead of falling as they may have, might be staying the same. But falling prices can be good for the middle class and poorer, for all of us. So even if this increase of debt does not on the surface create price inflation, it can still be stealing purchasing power from peoples wages, thus negatively effecting the economy.

So the debt is an issue. And we need to diversify in order to protect our portfolios.

I wish we could just create money for everyone, increase the debt indefinitely, and things would get better. But we all know deep down, in the end, financial wealth is not equivalent to money. If only it were.
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Re: Does our national debt matter when investing?

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