Personal Wealth Management / Expert Commentary
Fisher Investments Reviews How Investors Should Think About U.S. National Debt
Ken Fisher, founder, Executive Chairman and Co-Chief Investment Officer of Fisher Investments, reviews why US government debt isn’t as big of a problem as many fear. While Ken acknowledges such a large figure—$35 trillion at the time of filming—can feel alarming, he says it’s important to put the total amount of US government debt into perspective.
To start, Ken points out that a large portion—about $7 trillion—of US government debt is held by governmental agencies. Ken says this portion doesn’t require repayment in the traditional sense and should be extracted from the total dollar figure.
Ken also emphasizes the significant role inflation plays in reducing the real value of debt over time. According to Ken, inflation often feels like a burden because it erodes purchasing power and drives up costs. However, he also points out that that inflation eases the government’s debt burden over time because those interest payments are paid with future dollars. Additionally, Ken says inflation is typically followed by increased wages, which turn into increased revenues from taxpayers and help ease the debt load further.
Ken admits that he’s not necessarily a fan of debt, but he is confident debt in the US is not a problem currently. According to Ken, interest rates on US government debt would be much higher if investors believed the US was actually in the type of debt crisis so many fear.
Transcript
Ken Fisher:
Oh my my my. My column in November in the New York Post got more negative attention than pretty much any column I've done in a long, long time, and I love it because I know I'm right. In this column, I made the argument that we have a lot less debt- government debt-than you think we have. And I know I'm right and that debt isn't really a catastrophic problem.
Now, let me just take a moment before you find yourself vomiting and let me make the point that I'm not suggesting we should have more debt; I'm not arguing in favor of debt; I'm not a debt fan. I got my own views about what I would prefer in the world, which would be less total government spending.
But somehow, the presidents and Congress always like to spend money on what they think should be good, and they think what the other guy wanted to spend money on was stupid, but they got what they want to spend money on, they go ahead and do it. And if they spend money on it, we're going to pay for it one way or another. But they don't really create money on their own, that's really theirs. But they do-not they, but the other they-do create money through the Federal Reserve System.
Now, here's the point-inflation is always your enemy. Inflation always and only comes from central banks creating excess quantities of money relative to the growth of the economy. Let me go on a tangent for that for just a second. if the economy is going to grow at 3% a year in the longer term, and the central bank creates 5% a year, new money, and we're going to have a couple of percent a year inflation.
If instead the economy is going to grow 3% a year and a central bank creates 5% a year, excuse me, 8% a year, then we're going to end up with 5% a year inflation. And yet, often inflation has historically come in clumpy patches. You get a whole bunch, then you don't get much of any. So, let me just take you not quite in the order that I did it in my New York Post column, but let me take you through some of the same arguments.
We currently have $35 trillion worth of US government debt, in total. The number just seems huge to people. It's just huge. But ask yourself this question: what is the size of the annual deficit right now that creates more debt for the next year? And the answer is, in recent years, we've been doing about 1.5 trillion a year. Oh my God, 1.5 trillion more. So, now let me get you to another point. I'm not a fan of inflation, but we got inflation. And inflation is always the friend of the government and your enemy when it comes to the government repaying its debt. Let me take you through that on $35 trillion worth of debt.
The Fed wants us to have 2% a year annual inflation, but 2% annual inflation on $35 trillion worth of debt is $750 billion, by which that $35 trillion is devalued for the next year, making it $750 billion cheaper to repay and/or service. It's really simple. It's simple math. If you can't do the simple math and you don't believe it, and you think I'm wrong, then you're wrong; the fact is, that's part of why the central bank wants 2% a year inflation, because it covers about half the deficit, in terms of making it easier to repay the rest.
Part of the rest gets repaid by the normal growth of GDP, which on a now near $30 trillion economy, at $30 trillion US GDP, at their take, in terms of tax rate, covers another big chunk of the rest. Well, let's step back to two more points. Of the 35 trillion, there's about 7 trillion of it that doesn't cost the government anything at all because it's held by the government. It's not held by you or somebody else, and there's no interest coverage on it whatsoever. And that's always been true. That's not new. It's just people don't pay attention to it.
So, you take that out of the 35 trillion because it's not going to get repaid. It's just the agencies using it as sort of a piggy bank, more or less. I'm being over simple here and name a time. And then you got another feature that nobody thinks about. You take that $35 trillion of the debt; in 2021, that was $27 trillion worth of debt.
Oh my gosh. It's increased from 27 trillion to 35 trillion. Stop and think about it. Since then, the official Consumer Price Index went up by 20%. Now, you know in your bones that we actually had more real inflation than the Consumer Price Index shows. I don't know what that real number is, there isn't a right way to know what it really is. But, you know, it's higher, maybe it's 25%, maybe it's 30%, I don't know, exactly. And neither do you, exactly; but you know, it's higher.
So, if you take 25 and you apply it to the 27 that we started with, we've devalued that 27 in terms of repayment or servicing capability by well over 5 trillion. The 27 in real value became the equivalent then of 21 or 22 or something like that, maybe even less. Don't really know. But the inflation devalued all of the cumulative prior debt in terms of whatever the government would have to do to repay it, or just to service it on an annual cost basis. Now, here's the final mechanism in this that I want you to see. And people don't get this, but it's a basic. I mean, I learned this when I was a kid.
Milton Friedman proved this in the 1960s, and it's been true ever since. And economists never learn it because they're still living off the textbooks that they learned on, and they just don't seem to get it. But it's measurably true. Central banks create inflation. It's what causes inflation, through excess money creation, like we talked about before.
After that, with a time lag that's not perfectly predictable, but a pretty good period of time, wages rise to catch up with inflation. There's a lot of grumbling along the way. People talk about how it's unfair to the worker and all that's true.
But eventually wages catch back up to the equilibrium that existed before. So, the wages become paid in inflated dollars. How long does that take? A year to three years to complete the process, depending on what else is going on. But that's always been true.
Inflation first; wages follow. Used to be when I was a kid, people talked about things like cost-push inflation, that does not exist; it never existed; it's not real. wage-push inflation does not exist. If that was the case, we wouldn't have seen what we've seen in the last couple of years, which was you get this wave of inflation, 2021, 2022 into 2023, wages having not gone up and then wages going up in 23 and 24 and probably 25 adjusting to the inflation, what happens after that? You know what happens after the wages go up-your income tax goes up, if you're a worker.
What happens when the income taxes go up? Government revenue goes up. So, think about it-it's a three step process. Inflation, wages, government revenue. So, there's a time lag between when they create the inflation and when they get more dollars, the inflated dollars that they use to pay off the deflated debt. The debt that was deflated by the inflation, that was reduced in size.
Now, how do I know all this is true? It's real simple. People will tell you all the time-they're dead wrong-that we're at or were very near to a debt crisis. I just want you to get this in your bones-in your bones. The long-term bond market is a free market. Lenders know they want to maximize what they get for lending out money at any given term. Now, the central bank controls short-term interest rates, but they don't control long-term interest rates. And if we really were anywhere close to the cusp of a debt crisis, and in history, there have been a lot of countries that have had debt crises, a bunch of European ones as recently as ten years ago.
The PIIGS-you remember-Portugal. Italy. Ireland. Greece. Spain. PIIGS! Remember all them little piggies, in 10-15% interest rates? If we were anywhere close, long-term rates would have gone way up instead of not. The kind of rates that we have now- long-term rates-lower than the average of the last 100 years, is not reflective of what happens in a marketplace at or shortly before you have a debt crisis. Why? Because we don't have a debt crisis. Why? Because the government devalued the level of the debt by the inflation that was created by the central bank and continues to benefit off on an annual basis of the inflation that they continue to create that makes the total debt that we have- the 35 trillion now-cheaper to repay and or service. And that's just the juice of it.
You take it through those processes and you see-again, I'm not a fan of debt, I'm not arguing for more debt- I'm just telling you there's no crisis there because the inflation is the government's friend in servicing it. Thank you very much for listening to me. If you want more detailing on that, go read that New York Post column that I wrote in November that so many people hated so much because it didn't tell them what they wanted, which is what most people want to hear is, oh, we got a debt crisis. We got a debt crisis, we got a debt crisis, but we don't. So that'll help you understand why we don't. Thank you very much for listening to me. I hope you found this useful.
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