Personal Wealth Management / Market Analysis
Fisher Investments’ Ken Fisher Debunkery
Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher provides his perspective on fears that America cannot handle its debt. Ken reminds us that there are three basic forms of debt—consumer debt, corporate debt and government debt. In terms of consumer and corporate balance sheets, Ken reminds investors that the data is more positive than it has been in the last few decades.
Ken believes media pundits harp on government debt to stoke fear in viewers. He explains why other economic factors, like GDP and interest rates, are important to understand US government debt in context. For example, as the country’s GDP has risen with time and interest rates stayed relatively low until very recently, the government is able fulfill its debt obligations with a fraction of its tax revenue. While rising government debt could be problematic in the future, Ken believes the governments’ ability to service current debt levels with relative ease shouldn’t present issues for investors in the intermediate term.
There's just a lot of little nuances here. And I'm just going to tell you I'm going to delve into some of the nuances, but it's not as bad as you think it is. Or you might think it is, or you hear it is, or the media tells you it is. The media mostly likes to fanfare. So every month I do a video where I take something from my old debunkery book, one of the many topics, and describe what's in there but a little bit updated with.
Now 15 year later. Data. And. When I speak to you about today is a perennial. It's the fear that America can't handle its debt. Now. Let me just say, before I go further, America can handle its debt. Will it always be able to? I don't know about that. Always is way out there. But. When we say this, we're really talking about three basic forms of debt consumer debt, corporate debt, and of course, government debt. It seems like most of the time, government debt is the one people worry about the most.
Now I'm just going to say to you, and I'm not going to belabor it a lot, that consumer debt. Is overall not better than it was a year ago, but it's not much worse and it's better than it was ten, 20, 30, 40 years ago. As government debt has risen and become a more verbal topic consumers appear to have. Internalize that to themselves. And while consumer debt in absolute dollars has gone up. Assets for consumers have gone up faster. And so the balance sheet of consumers is actually better.
And in that of course, and this is also true for corporations in that of course there's always individual ones where that's not true. There's always individuals in corporations that end up individually doing stupid stuff. Of almost every type. But overall, for corporate and for consumer, this is better than it used to be. With government. It's a little surprising in the way it is. The gross debt that people talk about, the $30 trillion number, 30 plus trillion dollar number is, is such a big number that humans just really can't calibrate it in their brain very easily. You just need some kind of an extraordinary brain to calibrate $30 trillion.
But. There's just a lot of little nuances here. And I'm just going to tell you I'm going to delve into some of the nuances, but it's not as bad as you think it is. Or you might think it is, or you hear it is, or the media tells you it is. The media mostly likes to fan fear, and I think you know that. But the fact is that 30 plus trillion number is not a crucial number. Why? Because it's always true that the biggest owner of government, US government debt, is the US government itself in various forms. Used as sort of a savings account. I'm not going to get into subsets of that.
The biggest single one is the Federal Reserve System. But the feature is it's kind of paying interest from one pocket into another pocket. That net amount of debt when you get past that is about 25 trillion. It's still a big number, still scary. But media likes to use the bigger one because it's scarier still. The reality of that. Is that that number by itself doesn't make much difference. It makes a little more sense to compare that to the size of our economy GDP, US, GDP, which is about the same amount.
It's about a 1 to 1 ratio. But even that isn't what's really important. What's really important is. Service costs on the debt compared to A or B service costs on the debt compared to GDP. Which is our annual income. How much do we have to pay on the debt compared to how much income do we have, or service payments on the debt compared to government tax revenue? What does the government have to pay? During the recent so-called debt crisis, people kept talking stupidly about the US government defaulting, which couldn't possibly happen. Truly, if you understand what a default is and I actually did videos on at the time, the reality is defaulting means the government can't pay its. Interest or repay principal on the debt.
What I think a lot of people meant was maybe if they don't get a congressional budget passed. Then. The government may not have all the money that it wants to spend on all the things it wants to spend it on, so it might have to shut down some things called a government shutdown. And oh, by the way, we've had those many times before. And whenever we have a government shutdown, the government doesn't shut down. It just prioritizes and says these are the most important things that we can afford to keep spending on, and these are the ones we can't. So we stop doing those.
It never makes it that simple and easy to understand, but that's what happens. The fact is, and this is the point that I'm wanting to get you to. Interest payments on the government. Debt on a monthly and annual basis are less than 10% . Of. Tax revenue. Tax revenue to the government as it stands, is over ten times the interest payments on the debt. Therefore, they couldn't possibly default on the debt. That's their first obligation to pay no matter what. But be that as it may. This the point? I want you to see that number. Little less than 10% . 9% plus is the same level it was in 1980.
It's the same level it was when I was born. It's the same level that it was as we were going into World War two. People don't get that because they don't get the notion that a part of it is. The interest rate. Part of it is the amount of debt, and part of it is what's going on with the rest of the economy that provides the revenue that the government gets from taxing overall. If you actually think of that through another way, and I'm going to make this overly simple for you. Overly simple.
Think through normal income tax rates and apply that to income in a broad sense. GDP. Which isn't perfect, but it's a simple analogy. And that nine plus percent number comes down to 3% , which is also almost where it was exactly around 1980. It's almost exactly where it was, actually around 1960. And also about the time of my birth. What I'm wanting you to see is that while the debt number is big and scary, therefore. The reality of the government finance. This is not so much.
I want you to remember that most of the time and most of your life, unless you're young, normal interest rates and inflation would hover around numbers that are actually higher than the numbers that we have today. Now I'm going to make one more point. I know I'm talking too long here, but I'm going to make one more point. And that's about inflation. Categorically. When inflation goes up, lenders demand a higher interest rate to lender. They won't do it.
I should correct that. To say, it's when lenders expect inflation to stay high in the future because they're lending in the future. So what does that mean? Well, when we think about inflation, we all know that we had a lot of inflation fear over the last year, and long rates on government bonds and other long term debt instruments went up. That peaked in October of last year, and they've been down since then, although not hugely. And the reality of inflation. Is interesting at this point in time because I think everybody knows the official inflation rate has been falling. Prices are markedly higher than they were a year and two years ago.
But the official inflation rate, implying year over year at this moment in time, has been falling in recent months quite steadily. And yet is now interestingly lower than people think it is if you think about it correctly. The CPI, which is the way people think about it, typically a consumer price index. Is an constructed index that's not actually reflective of what any given individual does. Intuitively, some people are doing this. Some people are doing that. They don't get the average.
They get the difference of what they do and the prices of the things that they buy from the average, from those of the average. Well, what I want you to see is that if you take that CPI, there's a component in there that has nothing to do with a cash transaction. It's what's called imputed rent. It's the. Analysis that the government does of what homeowners would have to pay in rent if they had to rent their house. Which they don't have to do because they own their house. That's a component in the CPI, which actually today is in rigidly not wanting to come down, but doesn't actually involve a cash transaction.
Anybody actually does. And if you take it out. The actual CPI, then that remains of all the other components, it's actually only at a 2% . Year over year increase. The parts that actually move fast have been moving fast and it's not over with yet. We're not to a 0% inflation rate, and we won't be for a while because that imputed rent part on homeowners so called. Rent payments is going to be rigidly sticky for a while, I believe. But the cash inflation rate has already come down hugely, not reversing the higher prices from before, but we're not seeing the year over year increases moving forward that we saw as that fully realizes on people long rates will continue to become more benign.
Government debt will continue to become fully affordable at the levels that we're at. And overall, we'll get to a point where the Federal Reserve will cut short term interest rates and those rates will come down on government debt. I'm telling you, if we're now at the levels that we've handled nicely many times before, we will continue to be over the next year and two years.
Long term, I don't know. Long term is a long way away. Markets today won't price three or 4 or 5 years from now. Maybe three, 4 or 5 years from now. There's all kinds of problems. But in time periods that markets will price now, everything's not so bad.
Thank you very much for listening to me. I very much hope you enjoyed this video as part of my series on debunking Common Market Myths. To watch more videos like this, click the link on the screen and make sure to subscribe to Fisher Investment's YouTube channel. Thanks so much for listening to me.
A series of disclosures appears on the screen “Investing in Securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of Fisher Investments or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.”
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