Investment Contrarians

Why Government Inaction on National Debt Could Spell Disaster for U.S. Investments

By for Investment Contrarians |

National DebtA new report released on Tuesday by the Congressional Budget Office (CBO) reveals some damning evidence that the country is headed for trouble. (Source: “The 2013 Long-Term Budget Outlook,” Congressional Budget Office web site, September 17, 2013.) But then again, that’s not really a surprise, is it?

Of course, I have been complaining about the issues of the national debt and spending for quite a while ever since President Obama’s administration allowed the national debt limit to be surpassed; so far, there’s still no word on what to do with it.

I’m somewhat perplexed as to why the national debt limit hasn’t been dealt with. But hey, I’m sure it’s on the “to-do list,” and I really think the people looking at the national debt are stuck.

So as the House and the Senate continue to squabble over just about everything, I clearly see the country going down the wrong path to a massive national debt and runaway costs. The report earmarked the federal national debt held by the public at 73% of the gross domestic product (GDP), representing a record high.

America is better off than Greece, Italy, and Japan, but that’s not saying much.

And if everything continued to be status quo, the federal national debt held by the public would reach a staggering 100% of GDP by 2038. That’s an enormous amount. The associated carrying costs alone will be massive and will take away from spending on government programs.

Look, the massive national debt may not mean a lot to you, but for your kids and grandkids, it’s going to be a nightmare. For them, America may not be a nice place to live, especially if they’re not in the top five percent of income earners. In fact, I better begin to save a bit more for my kids.

The report also suggested that costs for Social Security and other healthcare programs will place enormous pressure on the government’s ability to get out of its deficit. No surprise here, given that the country’s population is aging fast and will place a drain on the country’s resources.

And with the massive build-up of the debt and deficit, the amount that will be needed to cover payments on the interest costs will continue to rise. The worst thing is that with interest rates likely set to move higher in 2015, each basis-point rise in interest rates will take money away from the government that could have been used for spending on programming.

As I have written in these pages several times in the past, the Obama government and those who follow will need to be tough and make sure costs are controlled. This may mean austerity programs, but without any type of strict cost control, the alternative would be much worse.

For the investor, in the absence of any government action, the problems of this runaway national debt could translate into less confidence in America globally, which could impact the strength of the U.S. dollar. If this occurs, you should be prepared for a possible slide in the value of the greenback and U.S.-denominated investments, such as equities, bonds, and commodities.

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