{"id":1198,"date":"2017-04-18T09:39:51","date_gmt":"2017-04-18T15:39:51","guid":{"rendered":"http:\/\/gpswp.com\/apwealthmanagement\/?p=1198"},"modified":"2017-04-18T09:39:51","modified_gmt":"2017-04-18T15:39:51","slug":"alarming-u-s-federal-debt","status":"publish","type":"post","link":"https:\/\/gpswp.com\/apwealthmanagement\/alarming-u-s-federal-debt\/","title":{"rendered":"How Alarming is the U.S. Federal Debt?"},"content":{"rendered":"
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How Alarming is the U.S. Federal Debt?<\/h3>\n

April 13, 2017 | Print View<\/a><\/p>\n

Since the lows of 2009, the U.S. stock market (S&P 500) has tripled as the economy and corporate profits have recovered. The federal debt levels of the U.S. government have almost doubled in the same time period. Federal debt outstanding has moved from roughly $10 trillion at the depth of the financial crisis to almost $20 trillion today.<\/p>\n

See the chart below illustrating the moves in both the stock market and the federal debt:<\/p>\n

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Federal debt increases are the subject of immense media sensationalism, political grandstanding, and investor anxiety. How did the debt increase so much? It\u2019s largely in response to the imploding economy during the financial crisis of 2008-2009. Debt increases are a function of the government not being able to pay its bills. Too little revenue (taxes) compared to costs (spending) equals budget deficits. Ever since 2001 the federal government has been running annual deficits, in fact they rarely show a surplus. See the chart below illustrating annual surpluses and deficits:<\/p>\n

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As an investor, should I be concerned about the ever increasing levels of debt at the federal level? The answer is really yes and no. We certainly don\u2019t want to see federal debt doubling every 8 years, but I would focus less on the actual debt number and more on the our government\u2019s ability to service (pay the interest) on its debt. When we look at our ability to service the debt, a less alarming picture presents itself. There are a couple of things to take into consideration when discussing debt service.<\/p>\n

First, what is the interest rate our government is paying on its outstanding debt? Before the financial crisis, rates on federal debt was close to 5%. Today it\u2019s down, closer to 2%. When rates are lower, the government can carry more debt and keep debt servicing amounts level. See the chart below:<\/p>\n

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Secondly, I think it\u2019s worthwhile to look at government debt interest payments as a percentage of our economy (GDP). Federal debt servicing costs as a percentage of GDP are at normalized historical levels. In fact, debt service was at much more alarming levels in the 1980\u2019s and 1990\u2019s when interest rates were much higher and defense spending was being ramped up, as seen in the chart below:<\/p>\n

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A few other things to consider on the topic:\n<\/p>\n