Power Up Wealth podcast – 34 Trillion in Debt – Episode 66 transcript:
Sharla Jessop 0:00
It’s safe to say that everyone has heard the US government is carrying a $34 trillion debt. That sounds alarming. Today, my guest and colleague Jordan Hadfield will explain why that might not be as concerning as you may initially think.
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
Thank you for joining me today, Jordan.
Jordan Hadfield 0:49
I’m very excited to be here.
Sharla Jessop 0:50
Jordan is an advisor, private wealth manager with Smedley Financial Services, and he holds a Certified Financial Planning designation and a BFA designation, which is behavioral financial advisor. Jordan, I have to say, any number that is 14 digits is big. And 34 trillion seems unmanageable.
Jordan Hadfield 1:07
Yeah, difficult to wrap your mind around for sure.
Sharla Jessop 1:09
It is. You have been studying about the national debt. And you’ve found some interesting facts we’ve talked about that are often overlooked. Things might not be as bad as people think. Explain that to us.
Jordan Hadfield 1:20
Yeah absolutely. So this is a fascinating topic. And it’s somewhat provocative. There’s a lot of misinformation out there. And people approach the subject of government debt with political passions, it becomes a fun topic to discuss, in my opinion. There are some significant misconceptions out there. When you share on the headlines. It’s just doom and gloom. One of my jobs as a private wealth consultant is to manage people’s emotions from a financial perspective relating to their financial decisions and their investments. And I would say nothing causes my clients more fear for the future than government debt. It comes up all the time, I’m having people ask me in my office, I have people ask me at home, my neighbors, people want to talk about the government debt. And it’s always from a place of fear. The government debt, as you said, is a big number. But we need to understand how government debt works. What it does for us, for our country, for the world, frankly, as you know, the issuer of the world currency, the benefits of government debt, and what the plan is to kind of try and wrap our minds around it. The first thing I want to say is relative to the $34 trillion number. If I say we’re $34 trillion in debt, there’s not enough information there to make a conclusion on anything. For example, Sharla, if I said, I have a million dollars in debt, your initial response might be, wow, a million dollars, like, what are you going to do? Right? But really, you can’t make a judgment off that alone. If I make, you know, $75,000 a year, and I’m carrying a million dollars of debt, I’m in big, big trouble. But what if I have $200 billion in my bank account, all of a sudden, a million dollars is like, oh, to pay that off? No big deal. Like it’s easy, like not an issue. And so 34 trillion when we’re talking about government debt is not enough information. And so I want to talk about what information is important. First of all, what is government debt, the government doesn’t have a credit card. They don’t charge money on a credit card and rack up this debt that is eventually going to be paid off. That’s not how government debt works. I have a budget constraint, I have to manage my income and my expenses, and I cannot go into debt. If I carry too much debt, there’s significant problems that can arise for me financially and my financial future. That is not how it works for the government. Household debt and government debt work very different. The problem is, is we’ve been trained our whole lives to think debt is bad, do not carry debt. Debt is counterproductive to wealth. And that is true from a household perspective. But there’s a huge difference between us and the government. And that is the government issues the currency, we only use the currency. That is a big distinction. And what that means is the government will never run out of money. You know, my dad used to always say growing up, money doesn’t grow on trees, right? Well, it does for them. It grows on trees for them, they can print money, which means they will never run out of money, any more than the universe will run out of space. Or carpenters will run out of inches. Like it’s impossible. They can print money. I’ve had people ask, can they just afford to pay off student debts? They can afford to pay off anything they want? Realistically, they could cut taxes to zero, and they could just print money forever. They can just print. Now, I know what the listeners are thinking, wait a second. What I’m trying to drive home here is that the idea of default is impossible. But that doesn’t mean they can pay off student loans. That doesn’t mean they can cut taxes to zero. It doesn’t mean they can just print forever, but the consequences of that isn’t default. That’s the first thing to understand. With me and my finances I risk default. The government does not. What the government faces is inflation and high interest rates. If we have inflation and high interest rates, that is the big consequence of too much spending, of too much money printing. So I’m not saying there’s not consequences, there are great consequences. It’s just not default. We work very, very different. Another thing comes up as the debt clock. We see the debt clock ticking up, you log in US debt clock, and it’s scary to watch it. I want to point out that that $34 trillion of deficit is somebody’s savings. So you can look at that debt clock as the United States debt clock. But you can also look at it as consumer saving accounts. Because when the government issues debt, it issues treasury bonds. Now, chances are if you’re listening to this podcast, you own treasury bonds. So when the government takes out debt, again, they don’t put it on a credit card, they issue a treasury bond, and investors buy that bond. They buy the bond, because it’s one of the safest bonds that you can buy. In fact, the Treasury rating on the 10 year treasury bond, the United States government treasury bond is so safe, that people call it the risk-free rate, whatever rate the treasury bond is paying on the 10 year is called the risk-free rate because it’s the safest investment in the world right now. That’s Treasury debt. So as we buy bonds, we’re buying the debt and the government pays the interest on their debt to whoever owns the bonds. Now, 47% of the debt is owned by private investors or institutions. Pension funds hold a lot of government bonds, they’re collecting the debt. Again, if you’re listening to this, if you’ve got a diversified portfolio, you own Treasury debt, and you’re making interest on it. So this 34 trillion in debt of the government equals 34 trillion of people who have invested in that debt as far as their savings accounts and are receiving interest from that. Does that make sense?
Sharla Jessop 6:58
It does. Yeah, I think it’s actually a very visual description.
Jordan Hadfield 7:02
Yeah, you know, if we’re gonna look at it from an accounting perspective, there’s, you’ve got two sides of the ledger, you’ve got the liability sides and the asset. Well, the government carries the liability side in the debt, but that money is moving to the private sector, which is an asset on our side. You know, one thing I say is if we had a magic wand, and we could erase the debt, most people would be like absolutely. Let’s get rid of the debt, zero debt. But if I rephrase the question, if you had a magic wand and could erase government treasuries, government bonds, would you? And people are like, what do you mean? Right? What? Why would I do? Well, you’ve already answered it, if you’re going to raise the debt, you’re going to restructure treasuries. And that 34 trillion represents savings. So that is a huge point to understand. The debt is an asset on one side of the ledger. And that is an asset for the public, for us.
Sharla Jessop 7:49
Very interesting when you put it that way. Because sometimes when we think of debt, we think we have a credit card, you need to pay it off, you have a mortgage, you’re gonna pay it off, eventually. But what you’re saying is that we’re not really ever gonna pay the debt off, and it’s probably not in the best interest of everyone if the debt is ever paid off. That’s not the goal.
Jordan Hadfield 8:05
Absolutely right. I hear all the time, our kids, how are they ever going to pay this off? They’re not, they’re not going to pay it off any more than you had to pay the debt, you know, that your parents were complaining about? You know, in 1937, the debt hit $36 billion. And if you look at the headlines, this is disastrous $36 billion in debt. And then in the 1940s, it hit $49 billion. The fear continued. How are we ever going to pay this off? You know, under Reagan, it hit $1.5 trillion with a T and people were just devastated. I mean, there was so much fear, and then it went to $3.5 trillion, and then $5.7 trillion under Clinton, and then $7.5, and it just continued to climb. Again, it will continue to climb the idea is not to pay the debt off, it’s to keep it balanced. That is the goal. We’re not talking about paying the debt off. We’re talking about balancing the economy. How much debt can we carry in a growing economy, and still be safe? One thing I that I think is really important to understand is what government spending does to the economy. Let’s say that the government wants to invest a trillion dollars into infrastructure, and they raise some of this money through different ways. But let’s just say in this example, that it’s debt, okay, so they take out a trillion dollars of debt to build the infrastructure. They take out that debt, again, buy treasury bonds, so they release treasury bonds and the public invests in these treasury bonds. They buy these bonds, and they collect the interest. They hold them in their IRAs, and in their brokerage accounts and in pension funds, other governments buy this debt, and they collect interest from this debt. So that’s a good thing for an investor. But an infrastructure bill also creates jobs. And as people go to work, right, it stimulates the economy, because now there’s these big infrastructure jobs that demand employment, and it demands trade, and it stimulates the economy. So not only does the investor get a bond that pays some interest with very little risk, but the economy gets jobs, those jobs are going to pay money. More money into the system. If there’s more money into the system, it’s going to stimulate spending, which stimulates more demand in other areas of the economy. And the economy grows. On top of all of this, we still get a trillion dollars of infrastructure for future growth. So government spending is a really important part of a healthy economy.
Sharla Jessop 10:25
Well, what would you say about the trajectory of that debt? In other words, it’s increasing, the magnitude of change is great. And it’s getting higher and higher and higher. And the percentage that it’s growing in the last few years has exceeded what we expected it to be. You know, we’re hitting a point now where we thought we might not be for years.
Jordan Hadfield 10:46
Absolutely. Right. So there’s some debate here. People ask me all the time, what is the healthy number, and nobody knows. There are a growing number of economists that say the debt doesn’t matter at all. And again, the biggest threats to government debt are one inflation, two higher interest rates, and three the inability to attract investors. So if we get too much debt, people might not want to buy American debt anymore. There’s a huge number of economists that point to Japan that say they are 262% debt to GDP is their ratio. And I’ll talk about what that means in a minute, but two and a half times what what our debt is, and yet they don’t have inflation, they don’t have high interest rates, and they’re still able to track the investors. So a lot of economists are saying the debt doesn’t matter as much. The debt to GDP doesn’t matter as much. And I disagree with that. And most economists still disagree with that. But know that there are people out there that believe that and have what they believe is evidence to back up their claim that it doesn’t matter. Most economists say that a healthy debt to GDP ratio is 100%. I think that’s a safe to conservative place to be. That’s what I personally believe 100% is a good place. So if you take the debt, and you compare it to the GDP. GDP is gross domestic product. In other words, how much is our economy growing? Basically, we’re saying debt to how much money the government makes. So again, we know the debt number 34 trillion, just like an example I gave earlier, if I’ve got a million dollars in debt, it’s not enough. How much do I make? That’s GDP? How much can the government afford? We are currently set at 123%. That is high, that has climbed up considerably in the last five years. I think the rate of spending that we have seen in the last couple years is unsustainable. I don’t think that we can continue to to pile on the debt and not have it affect us. We’ve seen interest rates go up, we’ve seen inflation. This is largely due to the stimulus package with the government pumping so much money into the economy. And it’s also, you know, a supply issue through COVID. But I think 123% is high, most economists will tell you that it needs to come down. I want to point out that it’s been high before. During World War II, we had a debt to GDP over 100%, well over 100%, and it came back down. So this number does fluctuate. And as our economy grows, we can handle a bigger debt number. But that percentage, I think, should be around 100%.
Sharla Jessop 13:10
For a safe number.
Jordan Hadfield 13:11
For a safe number.
Sharla Jessop 13:13
It’s manageable, I guess I’d ask, does debt matter?
Jordan Hadfield 13:16
Absolutely debt matters. But don’t get caught up in the 34 trillion. Because guess what, tomorrow is going to be 35. And soon it’s going to hit 38. And then it’s going to hit 45. We’re not trying to pay the debt off. That’s not the goal here. We’re trying to balance the budget. If we have a productive economy, where people are working and growing, and there’s demand for the dollars in the system, then we’ve got a healthy economy, despite the debt. If we start to pay off the debt, and choke off the money in the system, then we it leads to problems. Okay, the last seven times in history that we have tried to balance the budget, we’ve had a spinning surplus, we have had severe economic problems. Six of the last seven were depressions in the country. And the seventh was in 2000, under Clinton, and we had a recession, the money supply, the money in the system is the gasoline of the engine. And if we choke it off, it leads to problems. But we can’t put so much gas in the system that floods the engine either. It’s a balance. My overall point in all of this is 34 trillion is a big number. It’s difficult for us to wrap our heads around. But it is not a devastating number. I don’t worry about my children and the debt, they’re not going to be forced to pay this off, it will continue. And as long as the government can be fiscally responsible and keep it under control, we will have a healthy economy for them and for their children. That’s the idea.
Sharla Jessop 14:45
I like that positive attitude because I think it can really be concerning when people hear those numbers. And if we go back in history, you know, people are always concerned about what was changing and what was happening, but change is good.
Jordan Hadfield 14:56
Yeah, absolutely. And the subject is very complex. It’s difficult to provide, you know, sufficient information in 20 minutes. But I hope that anyone listening feels better educated, and most importantly, feels less scared about the number. I’m not saying that government spending isn’t important. We can’t print money endlessly without consequences. We need to be fiscally responsible about how and where we spend, and that comes down to voters, who do we want to put in power? And where are they going to spend their money? That’s an entirely different debate. And it’s an important debate we have, and it’s a far more important conversation, then we’re doomed, we can’t pay off 34 trillion.
Sharla Jessop 15:37
Jordan. thank you for that insight. I think it’s really valuable. And I think it gives people a different perspective.
Jordan Hadfield 15:42
Thank you. Thank you very much.
Shane Thomas 16:09
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn. The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
Power Up Wealth podcast – 34 Trillion in Debt – Episode 66 transcript:
