The Financial Seminary
The Federal Debt: The Brighter Side of the Coin
By Gary Moore
For The Sarasota Herald Tribune
Syndicated columnist Kathleen Parker recently wrote that when it comes to the federal debt, “the facts do not give optimists much to work with.” Yet the only fact she mentioned in the rest of the article is that it is heading toward one hundred percent of GDP in coming years. There are very good reasons to know far more facts about the debt than that. For example, Peggy Noonan, senior writer for The Wall Street Journal and former speech writer for President Reagan, recently wrote our greatest long-term threat isn’t our deficit and debt but that Americans have grown dispirited. We should know better than to let long-term projections depress us, and our economy, in the short-run.
In 1992, the Dow was around 3,000. The cover of The Economist caricatured America as “Sam, Sam, The Paranoid Man.” Even the book-of-the-year in conservative Christianity was about the supposed evils of the federal debt. Bill Clinton became the leader of the free world by exploiting our fears in “the economy stupid.” Yet the same year, Robert Bartley, the editor emeritus of The Wall Street Journal, was writing the much maligned federal deficit was “grossly over-rated” and “a great national myth.” My mentor Sir John Templeton, the “Dean of Global Investing” who was a Rhodes Scholar in economics, was predicting the stock market would soar despite the deficits and debt.
Today, the debt is being politicized again. The Economist has just featured “Angry America.” A Forbes.com article entitled “The Misinformed Tea Party Movement” shows many voters are still motivated by rhetoric rather than facts. Those surveyed estimated federal taxes consume three times the GDP they actually do. Most said federal taxes have been rising, though they have been falling to the lowest percentage of GDP since WWII. Most think America has gone “socialist.” Yet the Wall Street Journal recently said Americans receive 9.4% of their after-tax incomes from government, the lowest of any developed nation and one-third of France and Sweden.
The recent “Great Recession” was quite similar to the one of the early eighties, when inflation was in double digits. And since its bottom in 2008, the Dow has soared to 11,000. So a few facts might be enriching with developing markets doing even better.
Everyone knows the federal debt is approaching $14 trillion. Few know that according to the latest federal budget from the OMB in the White House, America’s assets are now $125 trillion. They have been growing even faster than the debt so America’s debt to asset ratio had actually fallen from 10.3% when Reagan took office to 6.5% in 2008. “W’s” last budget confessed: “The size of our net foreign debt is relatively small compared with the total stock of U.S. assets.” Yes, the debt has soared by $3 trillion since 2008. But the stock market alone has soared $4 trillion since the bottom. Further, statistics about debt do not consider what we own abroad. Professor Jeremy Siegel of Wharton has calculated: “Every dollar of international indebtedness is matched by a dollar of assets abroad.”
Compared to our income, our federal debt is approaching 100% of GDP. But it was 128% at the end of WWII. And we entered the war late. Great Britain’s was 240% at the end. And most of us assume the federal debt is owed entirely to foreigners. Reality is that Americans own one-half of the debt in the form of T-bills, notes and bonds, often through mutual funds. I feel that’s as threatening as owing half your mortgage to your spouse’s trust fund. So the CIA actually keeps tabs on how much debt each nation owes to foreigners. In 2009, it said ours is 52.9% of GDP, ranking us 47th in seriousness around the world. The average nation owes 56%. So The Economist recently reported the IMF, which is no dove on federal debt, has just concluded America can handle 71% more debt to GDP.
The post-election issue of The Economist quipped: “The leaders of the tea-party movement claim the mantle of Ronald Reagan but they lack both the Gipper’s sunny optimism and his pragmatism.” Reagan increased the federal debt to win the Cold War as he knew it would pay peace dividends far into the future. It’s estimated half our accumulated federal debt is due to past wars. Yet, as demonstrated by the first budget “compromise” after the election, most of our new house divided still wants butter while the other half wants guns but won’t tax or borrow to pay for either.
That virtually guarantees massive deficits the Federal Reserve must fund by creating money. And economic historian Niall Ferguson has written: “Inflation is a monetary phenomenon, as Milton Friedman said. But hyperinflation is always and everywhere a political phenomenon” (emphasis his). That would be a shame for all of us, especially our grandchildren. And it would be a particular shame on our leaders who prefer political rhetoric to economic education.
Gary Moore is a Sarasota-based investment counselor who has many publications on the morality of political-economy.
Gary Moore is an investment counselor affiliated with NPC Of America, member FINRA/SIPC. The views expressed are his alone.
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