The US Debt and Investing

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"Misguided Hysteria": Debt Causes Inflation and Other Common Misperceptions: Tech Ticker, Yahoo! Finance

This was an interesting article and one that made me re-think my position on my portfolio.

I have to wonder now if there isn't a lot of Irrational Pessimism out there now and domestic stocks could go long.

This article gives some perspective also:

learn-to-love-our-massive-deficit: Personal Finance News from Yahoo! Finance

[jIM_Ohio]

Comparing America to Greece is "like comparing apples to oranges," Thiruvadanthai says. Unlike Greece, the U.S. has control of its currency, a long history of managing its public debt without default, a proven ability to collect taxes, and a deep and liquid market for its publicly traded debt. For related reasons, he thinks there's little or no threat of a U.S. debt default and the latest rise in Treasury prices (which move in the opposite direction of yields) suggests global bond investors aren't too worried about it either.

If people say it can't happen to us, it will ("this time is different LOL")

There is no connection between high debt and economic growth - at all," Thiruvadanthai says. The report shows how high public debt is typically caused by wars or economic depression, which is accompanied by falling tax receipts and increased government spending on social safety nets like unemployment benefits. "It is economic weakness that causes public debt, rather than the other way around," he says. "In fact, the peak of the public debt typically presages a long boom."

That high debt is supposed to be paid off when times are good, when was last time US had a zero deficit?

Our Children & Grandchild Will Pay the Tab: "Unless we find some time machine that can produce economic [activity] now and take it out into the future," future debt payments - and the cost of "unfunded liabilities" - will be paid out of future economic activity, Thiruvadanthai says. Because Social Security and Medicare are ‘pay-as-you-go' programs, "there is no way that fiscal rectitude today would solve the problem in the future," he claims. "All in all, it is extremely difficult to conclude that the federal government's deficit spending is mortgaging our children's future to foreigners."

If those programs were ONLY pay as you go, then they would be self sufficient, but all those politicians mentioned in other quotes spent money from these programs when they ran a surplus.

The SS tax started at 1% paid only by workers back in the 1940's. The system was taking in MORE money than it paid out, yet the politicians saw the need to raise the tax 1200% over the next 40 years (that same tax is 12.4% now).

If the system was functioning as pay as you go all along, why did the tax of the program get increased close to 20 times over 40 years?

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JimOhio,

Hey believe me. . .I'm with you to a certain extent. I voted for Ross Perot. Twice.

So, this is an emotional issue for me and I could consider myself a past "debt hawk." But as much as it would take to swallow my pride I do have to consider what he is saying may be true (as any investor would to make money).

First of all, let's wrap our heads around what he is saying:

1. Total US indebtness is shrinking. . .meaning that while National Public Debt is growing (by a lot), apparently all of the municipal debt and private debt, everything from home mortgages to credit cards, to you oweing me $50.00 for a bet on the Superbowl has shrunk past the point of the National Debt growing (for the last 5 quarters according to him - I have NOT verified what he is saying is true or not; I am taking him at his word).

2. Related to #1. . .and this is where I am getting political. . .maybe it's not such a bad thing. Let's face it. . .I vote both ways - republican and democrat. It's a Republican mantra that people know how to spend better than the gov't. And probably borrow.

But is that Sacred Cow really true?

I see the Peasants borrowing for six packs of Coors Light, tattoo's, Marlboro's and flat screen TV's.

I see the government borrowing for roads, schools and energy development right now (and yes, a little pork like honeybee research). Maybe, just maybe, the people don't always manage their finances better than the government.

3. Finally to tie this into investing. . .maybe doomsday portfolio's (like mine to a large degree holding 33% in silver) arent the best way to go. ..that we are setting the foundation for a boom.

What say. . .did I just desecrate the Forum's Sacred Cow - all debt, especially National Debt is bad?

Sorry. . .I kinda feel bad exploring this too. . .kinda like exploring that God may not be a white bearded guy who regulary burned bushes 3000-5000 years ago and was into smiting and taunting people to murder their sons but then sending an angel at the last minute to intervene.

[jIM_Ohio]

JimOhio,

Hey believe me. . .I'm with you to a certain extent. I voted for Ross Perot. Twice.

So, this is an emotional issue for me and I could consider myself a past "debt hawk." But as much as it would take to swallow my pride I do have to consider what he is saying may be true (as any investor would to make money).

First of all, let's wrap our heads around what he is saying:

1. Total US indebtness is shrinking. . .meaning that while National Public Debt is growing (by a lot), apparently all of the municipal debt and private debt, everything from home mortgages to credit cards, to you oweing me $50.00 for a bet on the Superbowl has shrunk past the point of the National Debt growing (for the last 5 quarters according to him - I have NOT verified what he is saying is true or not; I am taking him at his word).

2. Related to #1. . .and this is where I am getting political. . .maybe it's not such a bad thing. Let's face it. . .I vote both ways - republican and democrat. It's a Republican mantra that people know how to spend better than the gov't. And probably borrow.

But is that Sacred Cow really true?

I see the Peasants borrowing for six packs of Coors Light, tattoo's, Marlboro's and flat screen TV's.

I see the government borrowing for roads, schools and energy development right now (and yes, a little pork like honeybee research). Maybe, just maybe, the people don't always manage their finances better than the government.

3. Finally to tie this into investing. . .maybe doomsday portfolio's (like mine to a large degree holding 33% in silver) arent the best way to go. ..that we are setting the foundation for a boom.

What say. . .did I just desecrate the Forum's Sacred Cow - all debt, especially National Debt is bad?

Sorry. . .I kinda feel bad exploring this too. . .kinda like exploring that God may not be a white bearded guy who regulary burned bushes 3000-5000 years ago and was into smiting and taunting people to murder their sons but then sending an angel at the last minute to intervene.

yeah but the masses mis managing their money create investment opportunities for me (in form of bonds and allowing me to buy stock in companies which make payday loans).

If the government mis manages the money, they either
a) ask me for more
b) change the economy (inflation, deflation, interest rates yadda yadda)

meaning the government screwing up will screw me and possibly the mis managers too.

Some debt is good... because the government debt allows bonds to be worth something- if there was no government debt, would their be government bonds?

[Stuartthomas]

You people really bring up an important issue...

[disneysteve]

Total US indebtness is shrinking. . .everything from home mortgages to credit cards, to you oweing me $50.00 for a bet on the Superbowl has shrunk

This is true, but it doesn't mean what most people think it means. It does not mean that people have suddenly seen the light and gotten more frugal and stopped overspending and started putting more of their income toward repaying debt.

The reason that personal debt has gone down is largely due to the housing mess, foreclosures, short sales and such. All of the people who have lost their homes have caused billions in debt to be written off. Also, all of the folks who had their credit card limits reduced or had their HELOCs frozen or closed resulted in them not being able to rack up debt like before. Finally, lending became much tighter so people haven't been able to get the loans they want because they can't get approved as easily as before.

[maat55]

This is true, but it doesn't mean what most people think it means. It does not mean that people have suddenly seen the light and gotten more frugal and stopped overspending and started putting more of their income toward repaying debt.

The reason that personal debt has gone down is largely due to the housing mess, foreclosures, short sales and such. All of the people who have lost their homes have caused billions in debt to be written off. Also, all of the folks who had their credit card limits reduced or had their HELOCs frozen or closed resulted in them not being able to rack up debt like before. Finally, lending became much tighter so people haven't been able to get the loans they want because they can't get approved as easily as before.

These are typical reactions in the free market. Without government backing there would have been much less consumer debt. The government caused the housing bubble, which created over consumption by using HELOC's.

The free market would police this on its own. This is why I favor the individual and the free market to maintain stability as apposed to a central planner.

[disneysteve]

Without government backing there would have been much less consumer debt.

I agree with this.

The government caused the housing bubble

I think this is an oversimplification. No single entity "caused" the housing bubble. There is plenty of blame to go around. Yes, the government threw around billions (trillions?) in cheap debt but there had to be greedy and gullible consumers on the other end for that to matter.

How many people rushed to buy brand new cars when the cash for clunkers program was launched? Yes it was the government that created the program but it would have been a complete failure if consumers used a few brain cells before marching like lemmings to their local dealerships.

Yes we've had ultra low mortgage rates but I don't even need a calculator to figure out that borrowing 100% of the purchase price for a home costing 5-6 times my annual income with an interest-only or adjustable rate mortgage is a bad idea. You don't need a degree from Wharton to understand that taking out a 125% HELOC is incredibly stupid.

And don't leave out the lenders themselves. How many banks and mortgage companies made loans that they knew the borrowers couldn't possibly afford but they lent the money anyway? Then they turned around and sold those loans to get them off of their books.

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Yes, there is plenty of blame to go around, but if I were to choose one single entity, one single person, I would blame the rating agencies.

It's one thing to bundle up a bunch of mortgages and call it toxic waste and sell it.

I believe in capitalism and anyone has a right to do that. More power to you. Go for it.

But it's another thing to rate that toxic waste as AAA, as good as cash, which caused billions of money to flow in. Essentially people put their money in what they thought was a sure thing and it wasn't.

So, no I don't beleive in a free market. An extremely deregulated market allowed this to happen - have rating agencies get their ratings bought and then investors make poor choices.

I'll admit I rely on those ratings to a certain degree. Not any more though.

No - laissez-faire capitalism is dead.

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That's another thing too. . .I know we all tend to think we are shrewder than other people and certainly, I would say Maat, DS, BA, and JimOhio and other regulars here are shrewder than the average person.

That being said, I oculd totally see me doing this. I know I have considered buying bonds before. . .and I would rely on whether it's AAA, AA, A, B or lower. But now. . .I am not so sure, you know?

Is this why the bond market sucks? Because nobody knows what the hell they are buying any more?

[PMMM]

Some bonds are doing quite well. For instance Corporate Bonds. Companies have been quite profitable though all this. They laid off employees, scaled back operations and quit spending while productivity remained static. They had the best of both worlds.

Government bonds are a little more risky I would think.

There just isn't anywhere to turn right now for a decent return. All are suspect to some degree and risky. I know my 401K has been getting hammered.

[maat55]

[QUOTE]

I think this is an oversimplification. No single entity "caused" the housing bubble. There is plenty of blame to go around. Yes, the government threw around billions (trillions?) in cheap debt but there had to be greedy and gullible consumers on the other end for that to matter.

IMO, smart bankers, who have their money on the line, do not loan to gullible borrowers. But, bankers who are backed by government programs will take advantage of what the government provides them. If the GSE's were not accepting bad loans, brokers would not have made them. This is where one improper element distorts the whole market.

How many people rushed to buy brand new cars when the cash for clunkers program was launched? Yes it was the government that created the program but it would have been a complete failure if consumers used a few brain cells before marching like lemmings to their local dealerships.

This is an example of how the free market should work. The free market response to a bubble is to deflate, once the deflation is corrected, the market will restart. The government mimics this with artificial gimics like cash for clunkers, but once the program ends, so does the recovery. It is better to allow the free market to deflate properly to have a real recovery.

This recession will not end until this happens.

Yes we've had ultra low mortgage rates but I don't even need a calculator to figure out that borrowing 100% of the purchase price for a home costing 5-6 times my annual income with an interest-only or adjustable rate mortgage is a bad idea. You don't need a degree from Wharton to understand that taking out a 125% HELOC is incredibly stupid.

These loans would not occur in the free market. Well, not as often.

And don't leave out the lenders themselves. How many banks and mortgage companies made loans that they knew the borrowers couldn't possibly afford but they lent the money anyway? Then they turned around and sold those loans to get them off of their books.

Again, caused by the GSE's.

[maat55]

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Hey believe me. . .I'm with you to a certain extent. I voted for Ross Perot. Twice.

I too, voted for him twice.

2. Related to #1. . .and this is where I am getting political. . .maybe it's not such a bad thing. Let's face it. . .I vote both ways - republican and democrat. It's a Republican mantra that people know how to spend better than the gov't. And probably borrow.

It is not that either one is smarter than the other, it is that the free market will better police debt and risk. The government is notorious for introducing improper elements and risk. It is a fundamental truth that he who sweats for a dollar will better use it, not every dollar, but the vast majority.

I see the Peasants borrowing for six packs of Coors Light, tattoo's, Marlboro's and flat screen TV's.

It is their free right to borrow from those who will lend.

I see the government borrowing for roads, schools and energy development right now (and yes, a little pork like honeybee research). Maybe, just maybe, the people don't always manage their finances better than the government.

I see government borrowing to subsidize food, housing, healthcare and nation building, but that is not its Constitutional duties.

3. Finally to tie this into investing. . .maybe doomsday portfolio's (like mine to a large degree holding 33% in silver) arent the best way to go. ..that we are setting the foundation for a boom.

I think you will be glad withing 2 years.

[disneysteve]

These loans would not occur in the free market. Well, not as often.

How do you remove the government from the banking system? The Fed sets the interest rates and controls the monetary supply. Do you think there is a realistic way to totally privatize the banking system?

[maat55]

How do you remove the government from the banking system? The Fed sets the interest rates and controls the monetary supply. Do you think there is a realistic way to totally privatize the banking system?

The banks should decide the risk tolerance wihtout competing with the GSE's. The Fed was supposed to smooth out the highes and lows by eliminating the booms and busts. They have done nothing to this end. The money supply should be partially backed by comodities to a certain %.

IMO, there should be no Federal Reserve, the free market should decide rates and risk tolerance.

Aside from this, the government should stay out of the market. There should be no GSE's or government student loans. Without the moral hazard, the free market could be more stable.

Banks should be regulated to make sure there is no predatory activity. The only viable government agencies are the FDIC and SEC(which is not doing its job).

Here is some dollar value data from 1800-2009. Notice that from 1800-1913 the value went from 1.96 to 3.36 of value. From 1913-2009 it went from 3.36 to 0.15 in value. Also notice the change in inflation during the 1800's as apposed to the 1900's.

Historical Value of U.S. Dollar (Estimated)

Also, notice the drop in value of the dollar since leaving the gold standard. Look for the chart.

History of the United States dollar - Wikipedia, the free encyclopedia