The national debt is a fairly misunderstood topic, with two extremes making fairly radical claims, whether those claims are that the national debt doesn't matter, or that the national debt is on the verge of hyperinflation.
I've made it pretty clear where I stand on hyperinflation in America, but let's focus specifically on the national debt overall.
Myth 1: It's Just Like Personal Debt.
Debt held by a government that has sovereignty over its own currency is fundamentally different than debt by a country that doesn't have said sovereignty. For starters, they're able to create an inflationary pressure to increase spending to purchase their own bonds to give themselves an incredible amount of leeway when it comes to a debt crisis.
Just look at Japan Vs. Greece. Japan's ability to manage their debt is better than Greece, mostly because they actually control their own currency.
Greece's problem is that they were using someone else's currency. Well, that's the official story, at least -- their real problem is that they were just spending too bloody much.
Myth 2: The Biggest Risk is Hyperinflation.
This is the biggest myth gold fans like myself often believe. The problem should be pretty clear by now, and over the next couple of years, we're going to see a lot of Austrian economists admit they were wrong about inflation.
The real risk is that the Keynesian experiment will fail to even spur on the economy at all. This should be pretty obvious now, because under Obama alone, the debt is up $5 trillion, and yet in May almost all jobs "created" were part time jobs. Real income is falling, people are working part time instead of full-time, and the economy is on the verge of a new recession.
The biggest risk now isn't hyperinflation. It's a recession that could crush the economy in a new round of stagflation. Remember, if the economy slows, so do our tax revenues -- that means the debt goes up faster, and that's obviously a bad thing. Mix it all together and you'll see a falling economy along with a falling dollar. Not a good mix.
Myth 3: Young People Will Have to Pay Up.
There's often this view that young people will have to fork over extra taxes to pay for the debt created now. Not only is this not true, it's also just completely unrealistic considering the political angle. If our debt is out of hand, no one will be paying it off in a traditional manner -- it'll be liquidated through monetary means.
Even then, the way the young will pay will be the same way the old will pay -- through lost opportunity cost.
And yes, lost opportunity cost matters. The great invisible tax in the history of the world has always been the lost opportunity cost. In this context, the ability to have a stable, slowly growing economy has essentially been robbed from us by people who believe that the only thing this economy needs is some more money printing. Hopefully, they'll learn their lesson.
What This Means For Investors
Hopefully, the implications of each myth should be obvious for investors trying to prepare for the long-haul. Treasury Bills aren't going to become worthless anytime soon, and those writers who claim that will -- including those even here who warn of dire hyperinflation -- are dead wrong.
It's also important to understand that doomsday "death by debt" portfolios are long, long term bets. In the next 5 years, unless the bond vigilantes kick into play, the national debt will not wipe out the dollar -- not even close.
Deflation is a far bigger risk in the immediate term, and the QE efforts the Fed has used and will use will likely boost stocks even more in the medium term.
In the short run, stocks and bonds ETFs mixed together and rebalanced regularly are perfectly "safe" -- at least as safe as they have been in the last 10 years. I know this is upsetting to bears and bugs for both of the assets, but, well, this time it's just not different.
If you're trying to prepare your portfolio for the debt when it's out of control, don't make any big bets, save relatively secure ones, like setting aside a portion of your portfolio to slowly amass gold (GLD) and/or silver (SLV) through dollar cost averaging. Physical is always preferred, of course.
Just remember, gold prices will likely go way down before they go way up, so dollar cost averaging will just be way of hedging your bet over the long term without taking too much risk on.
Additional disclosure: I own physical gold and silver and will be adding more to my position soon.