US Debt Ceiling – From Another Perspective

Congress just keeps fighting and fighting about the federal budget – and the debt ceiling is rearing its nonsensical head again. I continue to believe this whole US public debt issue needs to be understood from the reverse perspective.

I recently wrote a post on the size of US public debt and why I don’t think it is as large of a problem as many would have us believe.  I also wrote a related post on how institutional balance sheets (public or private) provide virtually the only way we can “store” money to be delivered in the future.

Again – and this is really important – being able to put away money and get it back in the future is quite a novel thing.

Think about cavemen where everything was day by day. Food would rot, the weather was unpredictable, you didn’t even know how to farm. There was little need to plan more than 24 hours ahead.

Now we can put away money in bank accounts, bonds, or many other places and be able to get the money back years, decades, even centuries in the future.

Institutional balance sheets make that possible. In other words, you give your money to an institution (government or company), they take it, do something with it, and promise to give it back later.

Baby Boomers need a place for their money

So now you have the Baby Boomers nearing retirement. This is a huge demographic pig-in-the-python. They are trying to sock away a lot of money for future redemption during retirement.

The US Public Debt – Perspective #1

The debt is big. This is really bad. aaaahhhhh!

The US Public Debt – Perspective #2

Those Baby Boomers are trying to put money away somewhere — so where the heck can they put it? It basically has to show up as someone else’s debt somewhere. In this case, a lot of it has filtered down to showing up on the US government’s balance sheet.

But what about private businesses to store the savings?

Sure, you can buy corporate bonds or other such instruments, but a lot of that money will end up trickling down to US public debts as well. What do you think happens when you go to a private insurance company and buy a fixed annuity? Answer – they take your money and invest most of it in US bonds. What do you think has happened to a lot of Apple’s excess earnings? It ends up on Apple’s balance sheet as cash – which ends up in a bank – which ends up buying some US bonds.

Everyone thinks about the debt as being the fault of an irresponsible government. I would argue that a major factor, although less visible, is the fact that all this savings from Baby Boomers needs some place to go. Likewise, with such a glut of savings hitting the market you would expect their investment returns to be low – possibly even negative on an inflation adjusted basis. Which, with interest rates so low right now, is exactly the environment we have.

I think a lot of unusual events will occur in the financial markets over the next 25 years as the Baby Boomers stop building up savings and start spending it down. Interest rates will increase, P/E ratios will go down, Dividends yields will increase, real estate prices will stagnate, and wealth will become more concentrated. One of these unusual events may very well be a much larger reduction in US public debt than is projected (just as the last 5 years saw it blow up quicker than projected). If the debt does go down, the political party in charge will take all the credit. The reality is that it is just a demographic inevitability.