We hear a lot about our growing national debt along with debate about whether it is really bad or just part of the landscape in government. There are arguments about the effect of our national debt but when it comes to investors and investing, there are several things worth considering.
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The Nature Of Debt
When we run a deficit as a country, government must make up the difference by borrowing to pay interest on the debt. This is money that could be used to invest in the private sector including the stock market.
Also, when government issues debt securities to pay the interest on the debt this has an impact on interest rates in general. Many economists believe government debt hurts private investment, manipulates interest rates and capital structure, suppresses exports and leads to higher taxes and inflation.
The Impact On You
One effect of rising national debt is the increased (although low) likelihood the government will default. As that likelihood increases the Treasury Department has to raise the yield on treasury securities to attract new investors. While that may sound good as an investor, it decreases the amount of tax revenue available to spend on roads, bridges and other government services. In time this could result in a lower standard of living for you.
The Impact On Corporations
As for companies in which you may want to invest, they will be impacted by increasing treasury rates as well. Business will become riskier and bonds will have to offer higher yields to attract investors just like treasury securities. This will lead to an increase in the cost of goods and services produced by those companies because they will have to raise more money to service their own debt (and the increased yield offered on their bonds).
Impact On The Economy
As the base cost of borrowing money – starting with the servicing of government debt – goes up and all interest rates go up, it will cost more to buy a home (and many other items as well). Home prices will go down as interest rates go up to attract buyers who are having a hard time qualifying for an expensive home. This will lead to an overall lowering of our net worth as individuals.
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Crowding Out Effect
With higher yield on U.S. Treasury securities, other types of investments, including stocks will become riskier and investors will gravitate toward safe government securities instead of stocks. This is known as the “crowding out” effect, a phenomenon that may lead to more government and a smaller private sector. It isn’t a real stretch to imagine that the resulting loss of social, economic and political power will result in national security issues for the country.