Experiment

July 22, 2020 - Published by IAG Wealth Partners

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June was officially the most expensive month in the entire history of our country. The federal government spent $1,104,903,000,000 last month in an effort to offset the economic contraction triggered by COVID-19.

That comes to about $3,350 for each of our 330 million residents. In one month.

This is likely the beginning of a very important experiment that may take decades to unfold: How much debt is too much debt?

Where does Congress get all this money to spend? They borrow it from a wide array of willing lenders ranging from individuals to other country’s central banks to pension funds to insurance companies. Since December 31, 2019, our total national debt has climbed from $23.2 trillion to $26.5 trillion as Congress temporarily suspended any limit on the debt.

It is fairly easy to forgive Congress for doing everything they can to keep our economy going during times of incredible uncertainty. Balancing the federal budget is an afterthought during a global pandemic. The question is whether their debt-fueled spending habits become permanent due to numerous “emergencies” that arise in the course of normal existence.

The good news is that our country’s debt has never been more affordable and there are currently many willing buyers. Interest rates are at record lows so interest payments are relatively reasonable. Thankfully, our country’s debt is still seen as a safe haven asset that is unlikely to default.

The grand experiment is how long both of these conditions can remain in place. If interest rates rise, the interest payments on the national debt could become one of the largest annual expenses within the federal budget. Congress would need to decide to reduce spending, raise taxes, or just add the interest cost to the total debt (and, therefore, increase future interest payments).

If investors start to question the government’s creditworthiness, they will likely demand higher interest rates to compensate them for the additional credit risk. This could easily become a self-reinforcing cycle.

The current conditions of low interest rates and safe haven status could go on for an extended period of time as Congress and debt buyers become more and more comfortable with the government borrowing more and more money to pay interest and other bills.

 

 

 

Quote of the week: Thomas Jefferson: “To preserve our independence, we must not let our rulers load us with perpetual debt.  We must make our election between economy and liberty, or profusion and servitude.”

This Photo by Unknown Author is licensed under CC BY-SA-NC

Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through IAG Wealth Partners, LLC, (IAG) a registered investment advisor and separate entity from LPL Financial.

Any opinions are those of IAG and not necessarily those of LPL Financial. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. No strategy assures success or protects against loss. Investing involves risk including loss of principal.

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