A recent Zacks Investment Management’s Market Insight e-mail newsletter included this article. So we asked iSectors’ CEO Vern Sumnicht to weigh in (on these particular 3 reasons not to worry about U.S. Debt –for now).
The U.S. debt is growing, but we do not believe it’s time to worry just yet. Here are three reasons why.
1) The U.S. Remains the Most Credit-Worthy Country in the World – the United States has the largest and one of the most diverse economies in the world. If ‘lenders,’ i.e., other countries and central banks that purchase the debt we issue were worried, then a) they would not buy our debt, and/or b) they would require to be paid more than the 2.88% interest rate that is currently offered on 30-year U.S. Treasuries. Yet, central banks across the world continue to buy Treasuries and most see it as the safest investment in the world.
VERN SUMNICHT: On the other hand these central banks have printed so much money and purchased so many of their own government bonds that they’ve driven interest rates so far down on their own government bonds that rates are now zero or even negative. So, US government bonds may be all they can buy.
2) U.S Treasuries are Vital to Global Financial Markets – this may sound odd, but the world needs U.S. debt. The reason is that many countries and central banks use U.S. debt as collateral for their own borrowing activities, and oftentimes U.S. debt is used as a reference rate for other debt in the world.
VERN SUMNICHT: But remember this! The BRICS countries have an agreement to trade among themselves in their own currencies. China and Russia are using their own currencies to buy/sell oil. The dollar is quickly losing its value as the world’s reserve currency.
3) Interest Payments as a Percent of U.S. Revenue are Low – by historical standards, if you look at how much the U.S. owes each year in interest payments as a percentage of our revenues (tax receipts, other investments), the number is actually quite low. Think of this relationship in terms of your own personal financial situation. If you’re making more in revenue than you have at any time in your working career (as the U.S. is today with record GDP and record receipts), you would probably be less worried if you were also accumulating more debt at historically low-interest rates. In other words, with such high revenues you would have no problem making your interest payments on time, just as the U.S. does. As you can see in the chart below, the combination of low-interest rates and record receipts means our debt is quite affordable relative to other times in history, particularly the beloved 1980’s.
VERN SUMNICHT: This makes no sense at all. It would only be true if your spending stayed the same, then higher income would make you feel more wealthy. However, if you’re constantly increasing spending and borrowing more and more money every year to make ends meet (like the US government!), you sure wouldn’t feel good about the added interest rates every year!
From Seeking Alpha – America’s Impending Debt Crisis:
Americans are more indebted than they have ever been throughout history, and as Trump’s tax cuts get signed into law, America may have a $25 trillion national debt by 2023.
The projected 10-year yield will likely be around 3.5% by 2023, implying that Americans will be responsible for roughly $875 billion just in annual debt servicing [interest]payments.