A handful of economic theorists have purported in recent years that the US economy is on the verge of collapse, the US Dollar is on its way to being worthless, and the global economy is about to crumble. Many of these alleged experts claim to have the answers for you when your “dollar becomes worthless.” This week we wanted to discuss why current trends are worrisome, but hardly cause for an economic collapse.
It is important to know that while some “Doom and Gloom” theorists work in the industry, many are not licensed. It is important to do your research when reading these theories. Be sure to log on to FINRA’s Broker Check and make sure that the person giving you investment advice is a reputable, licensed professional.
Investors who have subscribed to the collapse mentality cite the federal debt and the deficit as causes for concern. However, many mainstream investors have a hard time putting the difference between the debt and the deficit in to words. The federal debt is how much money the federal government has borrowed through the sale of bills, notes, bonds, etc. The deficit/surplus is the difference between tax receipts and federal outlays. Eliminating the deficit is rather simple; spend less than you take in. Budget surpluses do not add to the federal debt, but give the government additional funds.
Debt is not the problem that our government has, it is servicing the debt. Try finding a handful of people who own their home outright…you probably will not find many. Taking on debt is not bad; it is when you are unable to make your mortgage payment that problems occur.
Public debt (as a percentage of GDP) is on the rise, which is to be expected when engaging in 2 unfunded foreign conflicts. However, public debt is not the highest it ever has been. In the mid 1940’s, public debt was just over 120% of GDP, mostly due to the sale of war bonds to fund World War II operations in Europe and the Pacific. Currently the public debt is just over 100% of GDP (which is still quite troublesome), and has been rising since 1998.
Investors in fear of a collapse are correct when they say that the federal government needs to stop spending money, but they simultaneously fail to realize that the debt can easily be tamed by raising interest rates.
If rates begin to rise, the value of bonds in the open market begin to fall. Remember that the stock market is miniscule compared to the bond market. If interest rates double, then the debt will be cut in half; that is a fact in economics. Unfortunately, the Federal Reserve and Treasury have stated that they plan to keep rates at current levels until 2015 in an effort to spur borrowing by the public. Whether or not the free market forces interest rates up against the will of the Fed remains to be seen.
Inflation is another hot issue that many investors who have bought in to the gold and silver markets cite as a reason for a collapse. It is true that growing your money supply beyond the growth in your economy can be dangerous, but returning to the Gold Standard is not the answer. The Dow Jones Industrial Average halved 5 times prior to the Great Depression, all while we were on the Gold Standard, which supposedly leads to economic prosperity.
The Treasury needs to grow our money supply by roughly the same rate that GDP expands. If money supply tightens, business will begin to produce goods at a higher cost than they are able to sell them for. Without new dollars in a growing economy, we would have deflation, which can be more painful than inflation.
Those who have followed our articles know very well that we predict the US economy is at the starting line of a 20 year economic boom, similar to where the country was back in 1980. When making decisions regarding your portfolio, make sure you look in to who exactly is making predictions and if history favors their theories.