The debt issue is rubbish, a media fiction. Not a shred of evidence exists to show the economy is being stressed by federal debt. None. Debt is at reasonable levels, consistent with norms that date back to the Reagan administration.
More rubbish: We are not burdening our children with excessive debt. The guilt trip put on Americans for the last thirty years is wrong. We are investing heavily in the future. The numbers show we are adding much more value (twice as much) than we take out.
Let's start with $16.7 trillion in debt. It's really $12 trillion, as almost $5 trillion is an accounting fiction, the result of interagency loans. Agency with surplus lends to agency with deficit. Big deal. We want the net amount. It's $12 trillion.
Allocate $12 trillion of debt to 314 million Americans and it's $38,000 each. Fear mongers like to say the average American owes $52,000, but that includes the phantom debt I mention above.
So we have $38,000 of debt on the right side of the balance sheet. Half of the story. What about the left side of the balance sheet, the asset side? The average American has $239,000 in net assets. (Don't panic, cherubs, household assets will never be used to reduce the federal debt. For one thing, we're never going to pay off our debt. I'm just showing you we are a very wealthy nation, well deserving of our credit rating.) The six-to-one asset to debt ratio, by the way, is the same ratio we had twenty-five years ago under Reagan.
The facts: Debt costs us less today than it did during the Reagan years. Because of lower rates, interest on the debt costs us 1.4% of GDP versus 3% of GDP under Reagan. By next year, the cost of our debt will be even lower, as low as it was in the 60's. Like I said, not a shred of evidence showing a strain.
Debt can be good or bad, depending on how you use it
Debt cuts both ways. Everybody knows this: When things are bad, debt magnifies the bad. A shrinking economy makes debt worse.
The flip side doesn't get equal billing: When things are good, debt magnifies the good. A growing economy grows faster and bigger with debt leverage.
From corporations to individuals to government, everybody takes advantage of debt leverage. The average American homeowner does. Today, the average American homeowner has 50% equity in his house and 50% debt. That's a reasonable amount of debt, don't you think? A $200,000 house with $100,000 in debt? If the average American didn't take advantage of debt, he would own a $100,000 home with $100,000 equity. Without debt, he would be able to afford half as much home.
Get the picture? Debt expands the economic pie. It allows us to do much more. The average American homeowner enjoys more wealth (twice the home, same amount of capital) using a modest amount of debt leverage.
Government takes advantage of debt leverage too. During the Reagan administration, for example, public debt tripled, from $900 billion to $2.8 trillion, and it led to a fabulous period of growth. As I recall, the debt guilt trip was prominent in the media even back then; we were ruining the future for our children, seniors were taking too much in the form of entitlements. With 20/20 hindsight, it's fair to say we were underleveraged before Reagan (and GDP growth was stagnant), a situation he corrected with increased debt leverage to 50% of GDP.
What's the right balance of debt to GDP?
What ratio of debt to GDP optimizes economic growth? That's the question we should be debating. Is it 50%, a level Reagan established with great success? How about 73% of GDP, the level we're currently at? Under Truman, debt averaged 85% of GDP. During the Eisenhower years, it was 60%. Britain uses debt leverage of over 75% of GDP, and they're doing well. British citizens aren't bombarded with Henny Penny warnings that the sky is falling because of debt.
In the wake of World War II, our debt zoomed to 120% of GDP. How did we get the ratio back in balance? Economic growth. The economy doubled in just ten years. The number of dollars of debt continued to grow (as it should, debt reduction depresses growth), but the economy grew even faster. It took twenty years of growth to get the percentage down to 50%. Pretty cool, don't you think? You can improve your balance sheet without paying down a dime of debt by growing your way back into balance.
History shows we get lousy economic growth when we don't take advantage of debt leverage. Debt as a percent of GDP averaged 35% during the Nixon, Ford and Carter administrations, and growth was poor. Growth didn't take off until the Reagan years, when he took advantage of debt leverage, taking debt leverage to 50% of GDP. In the twenty-five years since Reagan, GDP has tripled, from $5.5 trillion to $16.7 trillion.
We're going to continue to use reasonable debt leverage
We've been subjected to scare talk and guilt trips over government debt for thirty years. Enough already. This country uses a reasonable amount of debt leverage, and we'll continue to do so. The numbers are big and they're going to get bigger. There's a good chance our children will live to see a $1 quadrillion economy. Yes, $12 trillion of debt is a big number. But so is our economy. So is our collective wealth. So is our potential.
Can we triple the economy again over the next twenty-five years, to $53 trillion? I'm just a crazy old stockpicker, crazy enough to think we can do even better. Tailwinds are in place. The Internet Revolution is causing disruptive change in every industry group. Business models are evolving at warp speed - tighter, flatter, more transparent. Housing is recovering, we've got an energy boom that has surprised everybody. Who could've predicted this ten years ago? America is back to being the #1 oil producer in the world. Woohoo.
We've got a lot to look forward to, in my view. As I contemplate the opportunity directly in front of us, in science and technology and business, it literally takes my breath away.
So, tell me again, why are we beating ourselves up over a phony debt problem?
(If you'd like to take a peek at my stock picks, go here.)