I hate to bring this up so soon after the Fourth of July, but there's an inconvenient truth lurking over the Stars and Stripes: We're drowning in debt. Buckets and buckets of debt. More debt than the world has ever seen. More debt than anyone knows what to do with, and, worst of all, more debt than anyone knows how to pay off.
Whether you like it or not, you have $31,300 of debt
Think about that for a second. Let it sink in. $31,300. It's the per-capita national debt in this country. In 1990, national debt was less than $3 trillion. At the turn of the millennium, the number was less than $6 trillion. Today it's over $9.5 trillion, and will be a few bucks higher when you're done reading this article. How so much debt was accumulated isn't much of a surprise. Budget deficits, trade deficits, stimulus packages, bailout packages … nothing new here.
But that isn't the worst of it. The 800-pound gorilla in this equation is that so much of our public debt relies on foreign investors. At the end of March, $2.4 trillion worth of U.S. debt was held by foreign investors -- twice as much as the amount held as recently as 2002.
And, boy, do they love our debt. We buy everything from oil to hairbrushes with dollars, so our overseas buddies have to do something with all their greenbacks. A lot of those dollars end up recycling back into U.S. investments -- Treasury bills, stocks, private equity investments -- so in the end, everyone's happy. We print, they buy. No one complains.
But for how long?
Can that setup continue forever? One side of the debate says it can, since there's no replacement for the almighty dollar. Countries will purchase as much debt as we throw at them, so the amount that accumulates is irrelevant. Print, spend, print, spend … repeat until wealthy.
But here's reality: Freddie Mac
What happens to our economy if foreign investors give up on us? Since bond prices and interest rates move inversely, waning demand for U.S. securities means higher interest rates. That might be good for parts of the economy, but ask the folks over at Washington Mutual
"No, no, no," the peanut gallery hisses, "Foreigners will always recycle dollars back into our economy." Abu Dhabi injected life into Citigroup
True, but massive foreign investment means transferring massive amounts of domestic ownership outside our borders. Like mortgaging off bits and pieces of our future, there comes a point where future generations won't tolerate paying excessive amounts of tax revenue to service foreign debt. Sending mountains of profits to other countries could become counterproductive for the U.S.
We've been here before
Homeowners found an easy path to wealth over the past decade: Leverage up, find someone to sell the debt to, then spend money like it's your last day alive. Sound familiar? It's practically how the U.S. economy as a whole operates. We now know how the housing party ended: Either the carpet gets pulled out from under your feet, or you're left owing an insane amount of your future to whoever owns your mortgage. Either outcome is a recipe for disaster. The big question is, will Empire Americana suffer a similar fate?
OK, OK, enough pessimism. Is there a way out of this mess? More importantly, can you invest around these circumstances? Yes, and yes. More on that next week.
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