Personal Wealth Management / Expert Commentary

Fisher Investments Reviews US National Debt Fears

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer, Ken Fisher, discusses long-held fears over rising US government debt. Ken says many investors look at debt the wrong way, focusing on the total amount. Ken believes it’s more important to look at the affordability of the national debt to get a better perspective of whether it is sustainable.

According to Ken, the US can comfortably afford its debt. He says interest payments on federal debt are a small portion of annual federal income, and as a percent of GDP are significantly lower than the 1990s—a positive stretch for stocks. He also believes US interest rates would be much higher than they are now if the US had a debt problem, as investors would demand higher returns for the added risk.


Ken Fisher:

Once upon a time, dinosaurs roamed the face of the earth. When they did, the dinosaurs feared there was too much debt. Fear of debt. Debt-phobia. Government debt, in particular I'm referencing about, has been around all my life and longer, and I'm almost a dinosaur myself. When this septuagenarian was just a wee lad, in the days when Barry Goldwater was running for president— and I remember this very well— there was fear that Lyndon Johnson was going to create too much debt for our country and destroy it.

Now, mind you, I'm going to tell you that the fear of excess government debt tends to fluctuate a little bit this way. When you have a Republican president, there tend to be a lot more Democrats that are afraid of the debt problem. When you have a Democratic president, there tend to be a lot more Republicans that are afraid of the debt. It's always, in some ways, partially masked as an attack on whatever party holds the White House. But this fear is always there, and it is, how do I say this?

There's ways to measure this correctly, and almost no one ever does, because the emotion is what drives the way people look at it. How should you look at it? Well, there's a couple that are the right way, but none of them lead you to a view that the debt as it exists in the United States of America is actually a material problem. And people will not accept that because they're so convicted on this. That's one of the things that I always love when I think about markets, is what risks do people have wrong? And they are so convicted of them by their emotion or their biases that they can't see through them.

The right way to see this is several. One, what's the carrying cost of the debt relative to either normal government revenue? Or the size of the economy? Both of which are relevant since government revenue comes out of the size of the economy. The fact of the matter is, and people will not get this, that fluctuates over time. But as we speak right now, total government debt has annual payments that on the one hand as a percent of GDP are the same level they were when Barry Goldwater ran for president when I was a lad. People don't get that.

They've been higher, rising up into the 1990 period as both debt and interest rates rose. They peaked in that period and then started to fall fairly well. In the 90s, they were twice the level they are now. But interest payments as a percent of government revenue and interest payments as a percentage of GDP, we are now at those same levels from when I was a wee lad, actually at the time I was 13 years old. And then I got to tell you, the 1960s were marvelous. It's a wonderful time. But I think this is a marvelous time too. People always look fondly on the past, and they don't quite get the decades from the present. They're going to look fondly on the present.

The fact of the matter is that another way to think about this, which nobody wants to think about? I mean, I live in Texas. I'm a pretty conservative guy. I know a lot of Republicans, but Republicans mostly get this wrong and Democrats don't even think about it. You either believe in capital markets and their relatively high efficiency. Or you end up going to hell. It's real simple. You get a choice.

Do you believe in markets or do you go to hell? Do you believe in markets or do you go to hell? There's other ways you can go to hell too, but that's one that's pretty sure. Now here's the point. Free markets set long-term interest rates. They just do. They're pretty efficient. Perfect? No. Pretty efficient? Yes.

If we really had a debt problem— because we've had a lot of countries in history that have had debt problems— you know what happens? Countries' long-term bond rates go through the roof at levels that make where we are today look like the biggest bargain basement you could possibly ever imagine. The market's already told you we don't have a debt problem. All you got to do is look at interest rates to see that. Go back and look, for example, during the so-called PIIGS crisis, at the interest rates of places like the PIIGS. If you remember Portugal, Italy, Ireland, Greece, Spain. PIIGS. Italy had 20 plus percent interest rates. 20 plus. Greece, worse.

The whole period where Greece didn't have any interest rates—couldn't get any. My point is—and they didn't go bankrupt, they just got to where people were real afraid they might. My point is, if we really had a debt problem, you'd see long-term interest rates go through the roof. That long-term interest rates are relatively benign by long-term history standards, I mean, where we are with long rates today, this is where we were most of history, where the US was most of history. Bounce around? Little volatility? Sure. But this is where we were most of history. The rates of the 15 years, the 10 years from 2010 to 2020—those are abnormally low rates.

What I want you to see is, well, let me go back to my prior point. Interest payments on federal debt, all in, comprise less than 10% of annual federal income. It is the first obligation of the United States government. At those kinds of levels. The government carries the debt easily and has many times before. Am I in favor of having more debt? I didn't say that. Am I in favor of the government borrowing money to spend it on this thing over here? I'm rarely in favor of that. The fact of the matter is, these levels of government debt are not problematic, but the actual amount of dollars is always scary to people. People always just believe that it is. They're certain that it is.

This is all historically pretty normal where we are, and therefore not to be feared. If that were not the case, interest rates wouldn't be where they are for long-term bonds, long-term government bonds, and that's the proof statement to you. So I'm going to just tell you until you see long-term interest rates kick up to some, you know, number like long-term government bond rates, like 8, 9, 10, 12%, don't get excited about the debt-phobia that you will hear from fear mongers every single year of your life, and that I've heard going back to the days of Barry Goldwater. Thank you very much for listening to me.

Voice of Ken Fisher:

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