Debt Ceiling – Cause and Effect

It is one of the most absurd political bargaining chips ever used. But it is a chip nonetheless, so Congress can’t help latching onto it.

Are you worried about the debt ceiling? Everyone seems to be. The problem is, they have this whole equation backwards. The cause and effect isn’t what it seems to be.

The general narrative

You’ve heard this before. Government spending is completely out of control so it keeps racking up debt. If only the government had to budget like a family or private company….everything would be handled more responsibly.

The real cause and effect

Ever considered that the size of US public debt (and for that matter the public debt of other developed countries) might be being pushed by the other side of the equation?

What do I mean? The baby boomers are at retirement or nearing retirement. If you were born in 1950, then you are 63. They are desperately trying (or hoping) to plug away money for the future. What would you expect with a large demographic segment attempting to do this? The money that is being plugged away for the future has to end up somewhere. It isn’t a given that you can put away money for future delivery. It has to be “stored” on another institution’s balance sheet to be paid back at a future time.

How would this show up? It would mean more bonds out there to “store” this money for the future. That means larger debts on institutional balance sheets (like governments). It also means larger balance sheets for banks to store this money (Sound at all like the Fed right now!!).

And what else would it mean? With all this competition to “store” money for the future, it would essentially mean an increased demand for “future money” and an under-supply of “storage” for it. Increased demand and limited supply means higher prices. When we are talking about “higher prices” of financial assets, it shows up as lower future returns. In other words, this demographic anomaly would naturally lead to a low interest rate environment.

No one’s “fault”

I’m not trying to shift blame from the government to private savers by my explanation. I’m simply pointing out the current size of public debts is not specifically anyone’s fault. Yes, we can certainly point to the mortgage crisis and wasted spending as someone’s “fault,” but there is also a larger and less visible demographic undercurrent that is at work. It is simply what you would expect with a country (and world at large) with these demographic characteristics. It also means the size of public debts is less of a concern than most people think. If it is simply a demographic inevitability, then it will sort itself out. Yes, there will be some pain, but it will fall much heavier on the savers who are going to get low future returns than on the public institutions that are simply providing the “storage” for the savings. How will it play out over the next 30 years? Become a client of Foster Wealth and I’d be happy to help you navigate this.

Photo by Pete Birkinshaw