U.S. National Debt Is Now Over $26.6 Trillion

The figures given above can be seen on the US debt clock (U.S. National Debt Clock:Real Time). They are thus readily available and widely known. This article will attempt to examine the significance of these numbers in order to make it clear to investors what sort of national economic environment they are in.

Lots of Debt

The first figure to be examined is the federal debt: $26.6 trillion. The debt to GDP ratio was not always so high. At the present time the debt to GDP ratio is like that of Italy, which was 134.8% in 2019 and is expected to reach 155% – 159% in 2020. (Italy sees end-2020 debt-to-GDP ratio at 155%-159% – sources)

It seems a bit rash to think that the US is in the same class financially as Italy. As things are going, it is probable that the federal debt will further increase before the end of 2020, so the US debt to GDP ratio may also increase. If there is a second wave of COVID-19, and governors impose lockdowns, the situation will be even worse. Another Corona virus aid package will raise the debt to GDP ratio.

It is difficult to find an up-to-date chart because the debt has been increasing so fast. The Statista chart below shows the growth in the debt from July 2019 to July 2020, from $22 trillion to $26.5 trillion. (Public debt of the U.S. by month, 2019-2020 | Statista)

The GDP for 2020 will certainly be less than that of 2019, which was $21.43 trillion. It is likely to be under $20 trillion, given the results of Q1 and Q2 so far this year.

The different ways of calculating how much GDP lessened in Q, and in Q2 may be a bit confusing, but the usual measure is based on a year. On a yearly basis GDP went down 32.9% in Q2. This makes the figure seem a bit higher than it really is because Q3 and Q4 will hopefully show some improvement. See the article by Wolf Richter, who reckons that the real decline in Q2 GDP was 9.5%.

(No, GDP Didn’t Plunge “32.9%” in Q2, it Plunged a Still Terrible 9.5%: Time to Kill “Annual Rates”)

The Budget Deficit

It is clear that a deficit of almost $4 trillion in one year, around 20% of GDP, is far too high. It may go even higher before the end of the year. The simple conclusion is that the federal government in Washington, D.C., has lost control of its finances. This can have serious repercussions on the stability of the US dollar as foreigners may begin to suspect that something is rotten in the state of US. Trust in the US dollar is essential to its continuing to be the main global reserve currency and principal currency for international trade.

The Interest on the Debt

The cost of servicing the national debt, currently at $337 billion, is relatively low in comparison with the amount of the debt. This is because the Fed has kept interest rates low, and this has as a consequence that servicing the debt costs less. There is also the consideration that raising interest rates will mean that servicing the federal debt will cost more just like increasing the amount of the debt will obviously mean that it will cost more to service it. At the present rate of increase of the debt, it is highly probable that the debt will top $30 trillion before the end of 2020 or soon afterwards. That will consequently entail higher expenditures for servicing the debt. The cost may well surpass $400 billion on an annual basis.

The Bottom Line

Investors should take into consideration that the low Fed rates have resulted in extremely low yields on Treasuries. This is one reason why investors have turned to HY bonds in order get some return on their capital despite the higher risk of default. Even IG bonds yield less than usual due to the Fed policy of ZIRP and even NIRP. So investors are pushed to increase their risk quotient. This is one reason why the stock markets are more attractive as they have potentially a much higher ROI than fixed income.

One problem with the stock markets is that they are currently disconnected from the real economy. The US is in recession with extremely high unemployment. Lockdowns have driven many small businesses to the brink of failure. Civil unrest has wiped out thousands of small businesses. The hospitality sector has suffered tremendously while airlines are struggling to survive. Many workers can barely pay their bills and are dependent upon government support. This is common knowledge, yet the stock markets have reached new highs after fully recovering from the March lows thanks to Fed liquidity injections into the financial sector.

Investors should reckon that in a high debt environment the element of risk is higher. Given that the COVID-19 pandemic has caused panic among politicians that have overreacted by closing down the economy, investors have to be especially cautious regarding their investments. Warren Buffett dropped his airline stocks and took a loss. Investors should be prepared to take a loss in certain sectors in order to avoid even bigger losses in the future. It seems that the bulls are running the markets at the present time, and some analysts see the S&P at 3,750. It is better to be cautious in case the stampede changes direction.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Data from third-party sources may have been used in the preparation of this material and WWS Swiss Financial Consulting SA (WWW SFC SA) has not independently verified, validated or audited such data. WWS SFC SA accepts no liability whatsoever for any loss arising from use of this information, and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Please consult your own professional adviser before taking investment decisions.
The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

All investments involve risk, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Data from third-party sources may have been used in the preparation of this material and WWS Swiss Financial Consulting SA (WWW SFC SA) has not independently verified, validated or audited such data. WWS SFC SA accepts no liability whatsoever for any loss arising from use of this information, and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Please consult your own professional adviser before taking investment decisions.
The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

All investments involve risk, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments.

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