General / Expert Commentary
Fisher Investments' Founder, Ken Fisher, Discusses What Rising US Debt Means for Markets
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Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher explains why investors should not fret over growing US federal debt levels. Ken says some pundits talk about total (or gross) US debt levels to frighten investors. However, he believes it is better to focus on net US debt—currently about 70% of gross debt—and the affordability of this debt, rather than its dollar amount. Ken points out current interest payments to service US debt hover around 2.4% of US GDP—consistent with previous levels from the 1960s, 70s and early 80s.
Ken admits this number could rise over time if interest rates remain high for a sustained period. For example, he observes how interest payments relative to US GDP increased to roughly 5% in the late 1980s and 90s before coming back down. Considering average maturity on US debt is about 6 years, Ken notes interest rates would need to stay high for several years before carrying costs of US debt worsen and potentially affect capital markets. He also believes forecasting long-term interest rates is nearly impossible and reminds investors to focus on a country’s ability to service its debt, not the absolute value of its debt.
Title screen appears, “Fisher Investments' Founder, Ken Fisher, Discusses What Rising US Debt Means for Markets.”
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Ken Fisher doing hand gestures from time to time explaining.
Ken Fisher: A perennial question I'm asked every year, but more so just recently because of the large spending increases that the government has legislated tied to the infrastructure bill and the so-called inflation bill and all those things, adding to government spending as well as the spending that occurred during the COVID period, is what's the impact of the growing federal debt? And is that a problem? Is it a big problem? Is it catastrophic? How much and how should you worry?
Let me try to just simply paint you a simple picture of that.
If you think of sort of the way a snail looks crawling around the ground, it looks like that. Does that make sense? Snails crawling around the ground, the shells up here, the heads here, the tails there. This is the way, in one way, to think about debt.
Most of the ways people talk about it are set up to frighten you. And there are some things to be afraid of, but there's things not to be afraid of.
It's often cast in dollar amounts that are so large that normal human beings like you and me can't really
fathom what you do with that much money. It's sometimes referred relative to the debt as a percent of the size of the US Economy. And that being bigger than it used to be. That's also scary.
There's a right way to think about it, and then a right way to think about things to be afraid of, and not.
The right way is first not to think of what is often bandied by those who would like to frighten you, which is called gross debt, but instead to think of what's net debt.
Net debt is about 70% of gross debt at any given point in time. It varies over time. At any given point in time the largest holder of US Government debt is itself government agencies that use it effectively like savings accounts with short-term debt. One agency issues debt, the other holds it like a savings account. And within the US Government this is one pocket paying another pocket. And that debt which is the government effectively owing it to itself, you don't have to worry about at all.
It's the net debt, the debt that the
government has issued, that somebody else owns. And that's what you should think about.
When you think about it then, its dollar amount isn't so much what's important, as what does it cost the government to support that debt? And we're going to come back to the snail.
So, if you think about the debt, you've got some debt that's short-term debt, some debt that's longer-term debt, some debt that's longer-term still, some debt that's very long-term debt. You're used to hearing these things: 90-day treasury bills, two-year notes, ten-year treasury notes, 30-year—you hear all those things.
The fact of the matter is, you take all
Those, and they each have an interest rate that was associated with when that debt was issued. And when you put all of those annual interest rates together for all of those issuances, you get the total amount of money that the government has to spend to service that debt. Should be simple to understand it.
That amount currently as we speak, is 2.4% of US GDP. Now, strange as it may seem to you, despite the increases in debt that have occurred, because a certain amount of the increase in debt is locked into longer term debt at lower rates from before now, and I'm going to come back to that, the 2.4% pretty much exactly the same as it was ten years ago.
Also, pretty much the same as it was
in the 1960s and 70s and going into the 80s. So, here's the 60s and 70s and 80s at 2.4%, and then going up into the 80s and 90s should get this hump that goes up into a little over 5%. And then as you move into the back part of the 1990s during the Clinton administration, it starts falling. And it keeps falling partly by debt initially being repaid in part of that period, but also the falling of interest rates, and time rolling over so those interest rates were locked into the maturity schedule of US debt down to the 2.4 level. That's the snail. 60s, 70s, 80s, 90s, late-90s, and on down, and then the 2000s. The snail.
Now, when you think about that, what you need to think about is at these new higher rates, how does that impact the carrying costs of that debt? That 2.4%. Obviously we've been having 2.4% carrying costs of the US debt for a long time. That hasn't been a problem.
What might be a problem? Well, we did in the 80s and 90s 5.4%, and we know we survived okay during that time period. So we know we could get back up to that 5.4% and still be okay. We know we did that for a long time. What would it take to do that?
And the answer is, well, it would take these higher rates there long enough to work through the maturity schedule of the US debt, whether they added more debt or not, to get back up to that point.
Now, let me give you a portrayal of that, If all of the debt was just short-term debt, all of it, which is far from true—the average maturity of the debt is six years. That's the average.
Longer, shorter, but the average is six years. If all of it which is short-term debt getting rolled over every 90 days, then at today's interest rates we would be at 5.1%. But it will take years and years to get to that 5.1%,
Will markets price that now as a reality? I don't think so, because it's entirely possible that before you would ever get to the 3, 4, 5, 6, 7, 8, 9 years necessary to get to that six-year average, it's entirely possible that interest rates come back down again.
Will they? For sure I'm not going to make that forecast. Trying to forecast what interest rates will be in the long term is beyond treacherous. I'm not going to try to do that. They might, they might not.
But in the next few years, which is what stock markets would price today, or bond markets would
price today, you can't have any way to know, and therefore they won't impact markets in some crisis,
catastrophic, or big problem way.
In the future you should be thinking about routinely that concept, and
seeking by looking online what's the carrying cost of the debt as a percent of GDP, and what's the average maturity of the debt? And if it's down at these kind of 2.4 or 2.8 or bouncing around in these kind of levels, there's no problem at all.
If it gets up into the three, four, five, maybe, you worry. We've never been at six or seven or eight, so, we don't really know what would happen then. We don't know how much the US could handle that carrying-cost burden.
But as long as we're down in these low levels, despite the scary notion of the large size of the debt, the carrying cost of the debt is something that we've done a lot, a lot, a lot of times a long time ago and over the last 20 years.
And so, you should relax and that
should make you somewhat more comfortable.
Thank you for listening to me.
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