Special to USA TODAY
Published 7:03 AM EDT Sep 22, 2019
America’s massive debt will doom us. That’s common wisdom, but wrong.
In Manhattan, a giant clock displays not only the total — almost $23 trillion for now — but your share, ticking up every second. Pundits say it’s trouble. But U.S. debt fears have lurked forever and those troubles are no closer now than decades ago. In some ways, they’re further off.
Here’s how to see that, using tools that show when debt truly becomes problematic.
The $23 trillion total seems jaw-dropping, but says little about what really matters: How readily Uncle Sam can pay the piper.
Pundits cite our debt-to-GDP ratio as evidence of a debt addiction. With $21 trillion of GDP, that ratio is 103% — lower than Italy’s and Japan’s, but higher than Germany’s and Britain’s. Debt topping GDP sounds dire. But that’s misleading. The federal government itself owns more than a quarter of U.S. debt, money the government essentially owes itself. It’s an accounting entry. As an asset and a liability, it effectively cancels out. Otherwise, net outstanding public debt is $16.7 trillion— 76% of GDP. That’s still unimportant.
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Why? Because debt-to-GDP is apples-to-nonsense. Debt piles up year after year. GDP is an estimate of economic activity in a single year, ignoring long-term assets that back a country’s liabilities. America’s hard assets via Federal Reserve data — business equity, real estate, fixed income holdings, cash — amount to $175.3 trillion, 10 times public debt. But again, that’s irrelevant.
Government solvency isn’t about paying off debt. It’s about affording interest payments and rolling over maturing bonds. Currently, annual U.S. interest payments represent just 9.8% of tax revenues, lower than any time in the 1980s and 1990s, when they peaked at 18.4%. If debt didn’t doom us then, why would it now?
Naysayers often rebut that by saying it’s all thanks to low-interest rates, which may reverse. Fair point. A 30-year Treasury bought 30 years ago carried 8.15% interest. Today, we can refinance at about 2%, a heckuva deal. Plus,10-year debt is cheaper too. But rates only matter to the government’s finances at issuance. Since America’s debt averages about six years in maturity, short-term rate wiggles don’t create danger.
For debt to become a problem, Uncle Sam must spend like a drunken sailor for decades (which he may). Or interest rates must skyrocket and stay there, with the country’s interest payments ballooning and investors demanding more return for more risk. Do you see any signs of that now? Maybe someday. But not any time soon.
Pockets of debt trouble do exist around the world. To see them, look to markets. Compare low-default-risk Treasury rates to similar-maturity rates from other issuers — it’s called a credit spread. For example, South Africa and Turkey are both suffering significant debt pressure. How do you know? America can borrow for 10 years at 1.62%. Investors demand 8.82% to lend to South Africa. Turkish rates are 15.18%.
Use that same approach to assess corporate debt. Corporate America doesn’t have a debt problem, despite frequent fears that hinge on its debt total alone. Overall corporate spreads have declined this year. To be sure, oil price pressures have squeezed the tiniest U.S. shale-oil drillers. Bonds of less-creditworthy drillers now yield 10.3%, up from 7.4% a year ago. That rise — while rates overall plunged — signals trouble. No shock: Driller defaults are climbing.
But while problems with debt darken isolated patches, debt doom doesn’t loom over America.
Ken Fisher is founder and executive chairman of Fisher Investments, author of 11 books, four of which were New York Times bestsellers, and is No. 200 on the Forbes 400 list of richest Americans. Follow him on Twitter: @KennethLFisher
The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.