How Will We Ever Pay It Back - Marty Moore, Carroll Financial
March 16, 2021

Newsworthy: How Will We Ever Pay It Back?

Author: Marty Moore, CFP®

*** Fair Warning: What follows is my take on the huge amount of government debt taken on over the past year to revive our economy.  I’m not an economist; although, I’m not sure it would matter if I were.  Even the most trained economists are guessing at what the consequences of last year’s, and the current, stimulus programs will have.  I’ve tried to be as concise as possible, but you can be the judge on that.  If you’d rather get outside and enjoy the beginnings of Spring, I wouldn’t blame you. 😊

How Will We Ever Pay It Back?

Congress recently passed the latest stimulus package, totaling 1.9 trillion dollars.  That amount of money is hard to comprehend.  The biggest provisions include:

  • $1,400 checks per adult (phased out at higher income limits)
  • Extension of additional $300 weekly unemployment benefits through September 6
  • Expanding the current child tax credits
  • $350 billion for cities and states
  • $170 billion for schools
  • $100 billion for health including targeted coronavirus support

The question on everyone’s mind is: “How in the world will we ever pay back this amount of borrowed money?”

The short answer is we won’t pay it back – in all likelihood.

Unlike you and I, the federal government is only required to pay the interest on its debt; the principal doesn’t have a maturity date.  It never really comes due.  For you and me, it would be like having a perpetual, interest only mortgage.  As long as we pay the monthly interest we keep on rolling.  Of course, no lender would ever be willing to give us an open-end, forever mortgage.

So, for our federal government, all good, right?

Well, not necessarily.  Even though the government controls the printing presses, there is a limit to how much debt can be realistically managed.  Too much debt, with interest payments that get too high and out of control, can lead to not-so-good consequences, mainly high inflation and declining value of the dollar.

High inflation = stuff costs more.

Declining value of the dollar = stuff we buy made from overseas cost more.  (And we buy a lot of stuff from foreign countries.  China in particular.)

So, even though we have more money, what we spend it on becomes more expensive, sometimes a LOT more expensive.

High inflation, however, has become almost a foreign concept to us here in the U.S.  It’s been a long time, since the 1970’s, that it was a problem.

So, how much debt can the U.S. handle?  Nobody really knows.  The only precedent we have is the huge, massive debt taken on after WWII in order to get our economy moving in the right direction and prevent another severe depression.

The heavy borrowing after WWII never really became a problem though.  You can see how the percentage of debt came down quickly.  How did this happen? 

We were able to manage the debt load because the borrowed money was spent productively, injected back into our economy in a way that led to rapid economic expansion.  This expansion made all the difference.

Think about it this way: If you had debt of $50,000 and an income of $50,000 but was able to increase your income to $100,000, you could much better handle the debt.  That’s what happened after WWII.  A country’s economy (GDP) doesn’t equate perfectly with an individual’s expanding income, but it’s the same concept.  And it’s why the runup in government debt after WWII didn’t become a problem then as many feared it would.

But what about inflation you say?  Didn’t prices rise and become a problem?  Things did become more expensive, and we did have a short spike in inflation but it was short-lived.

So, the hope is that a similar scenario will play out this time too.  No guarantees though.  (As you can see from the debt chart the amount of debt back in the mid 40’s is about where it is now – relative to the size of our economy, GDP).

I’m quite sure that the threat of high inflation will become a topic of discussion over the coming months.

I’m gazing into my crystal ball as I write but it seems logical to me that the massive amount of money we have borrowed for the stimulus programs will likely lead to a pickup in our economy, maybe in the same way as it did after WWII.  If it does, actual inflation, or even the potential for inflation, will become a concern.

How will the market react if this were to play out?

(Still gazing – actually, now squinting – into the crystal ball…)

Expanding economy = good for the stock market (usually).

Rapid increase in inflation (or even the threat of high inflation) = typically not good for the stock market.

Which of these scenario’s is likely to play out?  My crystal ball is way too cloudy on that issue.

So, what do we do?  The same as we’ve always done – establish a sensible long-term investment plan that can weather the ups and down in our economy and the financial markets. 

Lessons Learned From An Investment Pro

John Rekanthaler has been researching the mutual fund industry since 1988.  He was one of the founding members of Morningstar, Inc., a well-respected investment research firm, and he is widely regarded as one of the most insightful and thoughtful professionals in the investment world today.

Here’s what he wrote recently about what this past year has taught him, even after all his years of experience.

Last spring, I realized that almost nobody can successfully forecast the direction of the stock market.  Over the years, I had seen enough market-timers and tactical allocators fail to appreciate the enormity of the task.  I also recognized that economists have enough difficulty estimating the next quarter’s GDP growth, never mind what will occur in 12 months’ time.

Yet, despite my experience, I deceived myself into believing that I possessed special insight.  That happened because the market behaved as I expected during the early days of the COVID-19 crisis, thereby leading me to overestimate my abilities.  It mattered not if I understood the problem relatively well.  To make an accurate prediction – one that would benefit an investment – my understanding needed to be deeper yet.

Thinking through market conditions is a useful exercise.  Better to suffer investment losses that were at least partially anticipated than to have them come as a surprise.  Beware, however, the danger of taking such analysis too seriously.  My self-belief was greater than my insights.  In making that mistake, I am far from alone.

(Emphasis mine)

A Tough Year For All Of Us

This past year has been unlike anything any of us has ever experienced.  It’s been difficult for everyone; tragic for many who have experienced loss and great hardship.  It’s heartening though to see the hope ahead, the light at the end of the dark tunnel we’ve been in.

Surely, it’s easier said than done, but I also think we must try to do what author Kurt Vonnegut implored graduates to do in a commencement speech he once gave.

“My Uncle Alex, who is up in heaven now, one of the things he found objectionable about human beings was that they so rarely noticed it when times were sweet.  We could be drinking lemonade in the shade of an apple tree in the summertime, and Uncle Alex would interrupt the conversation to say, “If this isn’t nice, what is?”

So, I hope that you will do the same for the rest of your lives.  When things are going sweetly and peacefully, please pause a moment, and then say out loud, “If this isn’t nice, what is?”

Yes, it’s been a tough year.  But, as the weather warms up, I’m going to make some lemonade and sit for a good while underneath a shaded tree.  It will be a nice time, for sure.

As always, thanks for reading.

Marty

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