U.S. National Debt: No-Win Situation for Next President
Whoever takes the White House, the national debt will greet them.
Here’s an inescapable fact regarding the November Presidential Election: The U.S. national debt is about to cross $35 trillion, and whether a Democrat or Republican wins, they won’t be able to zero that out.
In fact, given the age of the two presumptive nominees as of this writing, neither will their grandchildren. That figure amounts to nearly $267,000 per U.S. taxpayer.
The national debt is essentially the financial love child of the Republican and Democratic parties, having both contributed their fair share. The populace and voters get a chance regularly to decide who to blame, and whether or not the racked-up pile of borrowed money is a primary issue for them.
Regardless, there it sits. Or, more accurately, there it goes, rising at a rate that is tracked nicely by USDebtclock.org.
That site includes not only the national debt in total, but several other details that ETF investors should be interested in seeing. What does this have to do with ETFs? Everything!
ETFs are another aspect of the financial world that, along with the U.S. debt burden, is now counted in trillions where once it was “only” billions and before that, millions.
ETFs started in the US in 1993. That was seven years before, as we Baby Boomers recall, a key debate issue in the 2000 U.S. Presidential election (Bush vs. Gore) was…wait for it…how best to spend the country’s budget surplus.
The Markets Don’t Care About the National Debt, Yet
The ever-accelerating debt, both in dollars and rate of ascent, has frankly not been an issue for the stock and bond markets too often. It is often discussed, but to this point, investors have made it an issue to worry about “later,” if at all. However, if all eyes turn to the issue, and do so with deep concern, that could prompt a selloff in ETFs of all types.
If that were to happen (and it is still a big “if”), the central worry might not be the ability to pay the debt back. Instead, it is the servicing of that debt, i.e. paying interest on all that principal, that could curtail government spending. Not only the spending that might be used to boost Gross Domestic Product (GDP) and trickle down to corporate earnings, but the spending that keeps things like social security on par with where it is now, in terms of payments to those who paid into the system.
So yes, this is in some ways, everyone’s problem. And no elected official can make a dent in it without some coordinated effort, the likes of which have not occurred for some time. It is these types of macroeconomic risks that prompt some financial advisors and self-directed investors to learn more about “tail risk” hedging using ETFs, as well as a growing number of funds that seek to define return and limit risk.
US National Debt to GDP Ratio and Deficit Spending
At a time in the market cycle where the headline U.S. stock indicators seem to regularly hit all-time high levels, the other aspect of the debt issue is the disturbing ratio it has reached versus US GDP. In 1980, the country’s debt to GDP ratio stood at a slim 34%. Now, it is 122%, a level at which historically, even prosperous nations have had a very difficult time dealing with.
According to the debt-tracking site, the US takes in about $4.9 trillion in annual tax revenue. That’s a nice number…until we learn that the spending rate is $6.8 trillion. That’s where deficits come from, and how they fail to close.
So, as we start to inch closer to the election, keep in mind that one issue will still be a reliable conversation topic well after the outcome is determined. The U.S. national debt is not a genie we can collectively put back in the bottle. Hopefully, those who most influence its path can find a way to get together and start to reverse its course.