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welcome to personal finance for long-term investors where we believe Benjamin Franklin's advice that an
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investment in knowledge pays the best interest both in finances and in your life every episode teaches you personal
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finance and long-term investing in simple terms now here's your host Jesse Kramer hello and welcome to episode 102
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of personal finance for long-term investors my name is Jesse Kramer if the US government was a household would it
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be drowning in debt or simply managing a a big mortgage or does that analogy between the government and a household
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not make any sense at all and perhaps we need to rethink and correct the way we conceptualize government debt today
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we're going to dive deep on the US national debt ultimately we're going to
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discuss how the national debt actually impacts your daily life your Investments and your financial future but to get
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there we're first going to explain how we got here why we keep going deeper into debt on what seems like an annual
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basis why experts simply aren't that concerned about the national debt whatsoever why the US national debt is
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fundamentally different than household debt I guess I didn't really bury the
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lead there too much did I on what the path forward out of debt looks like long story short my goal here today is that
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each of you leave this podcast episode feeling like you understand the US national debt situation significantly
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better than you might understand it right now and if need be perhaps you'll make some changes on the personal side
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of your Ledger based on what you learn here today so let's let break down Uncle
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Sam's debt situation connect the dots to personal finance and long-term investing
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but first a quick review of the week this one comes from ashb who left us a five-star review on Apple podcast and
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said excellent pod Jesse does an incredible job of breaking down complex Financial topics into easy to understand
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language I'm a big believer that successfully navigating Financial Planning and investing is a relatively
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simple process it's Wall Street that wants us all to believe it's so complicated Jesse does a nice job
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cutting through the noise well thank you very much ashb and thanks to all of you
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who leave your kind words or five-star reviews on your podcast players Ashby when you hear this drop me an email to
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Jesse bestter interest. blog and I'll send you a super soft best-interest t-shirt okay back to the national debt
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the US has carried debt since its very Inception debts incurred during the American Revolution that's the 1770s for
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you playing at home during the Revolutionary War amounted to $75 million in debt primarily borrowed from
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some domestic investors mainly from the French government to help the rebels as it were buy some War materials and then
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fast forward to today our debt stands at $ 36 trillion as I record this in February of 2025 by the time you're
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hearing these words who knows where it'll be 36 trillion and change will say
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you know just a little bit of change on top of 36 trillion and that US debt it's
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broken down into two main components the first is what's called intra governmental or within the government
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itself a good example of that is uh currently that the US government owes debts to Social Security and Medicare
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there were many years during the 20th century mainly where as an example Social Security took in more tax dollars
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than it paid out in benefits right there was a surplus an annual surplus of Social Security money during those years
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and somewhere on the government's books in its accounting Social Security lent
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those surpluses to other governmental wings and now the government owes a debt back to Social Security we can kind of
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easily use right here that that common metaphor of the left pocket owing money to the right pocket the government owes
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money to itself it's not quite the same as a real debt it's a debt on paper but
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it's all under the umbrella of the US government and in that way we shouldn't
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really count it but once we go beyond intergovernmental debt though now we get to the debt held by the public or debt
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that the government owes to anything and anyone who's not the government it's
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outside of the government's umbrella of the 36 trillion in debt about 7 trillion
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of it is intragovernmental which means that the other 29 trillion is owed to entities outside of the government of
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that 29 trillion that's owed outside the government and we are going to spend a
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good amount of time explaining exactly what's going on there roughly 25% of that debt is owned by foreign countries
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and the remainder is owned domestically here in the USA but okay exactly what what does does that mean how does
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another country own our debt or actually for that matter how do we own our own debt what does that really look like in
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practice and the simple answer here and it is a simple answer is treasury bonds or treasury bills or treasury notes
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we've talked about here before on the podcast how bonds are simply the act of
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owning someone else's debt you can corporations all the time or or governmental bodies your local County
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the state they issue bonds to to raise money right they need to raise money somehow and they borrow money by issuing
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Bond someone else buys the bond and says I will buy the bond for $1,000 it's a
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loan you owe me the $1,000 back plus interest over time that's what a bond is
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and treasury bonds are the form of the US government's debt if you own a treasury bond which almost all of us
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probably do somewhere in our portfolio then the US government is indebted to you and right now there are about 2829
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trillion in US Treasury Bonds in existence again 20 to 25% of those are owned by foreign countries and foreign
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investors and the remainder are owned by domestic investors and domestic institutions as investors we all know
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that bonds pay us interest so yes that means that the US government is paying interest on the debt that it owes us in
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fact in 2025 that total interest payment is likely to approach $1 trillion now on an annual basis does the
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debt grow or Shrink and why well in recent decades it's done nothing but grow and the simple reason is that as a
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country we spend more than we earn and then our debt increases that's a principle that yes should make total
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sense to us on a personal finance level it's about a budget in 2024 the US government budget had
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6.75 trillion of spending but only estimated about $ 4.92 trillion in Revenue that results in a $1.8 trillion
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deficit for the year of 2024 or in other words our total national debt increased
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by about $1.8 trillion okay the next common question that might come up is where does the US Revenue come from the
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biggest answer by far is taxes individual income taxes Medicare taxes and Social Security taxes make up about
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80 to 85% of the US government's annual revenue corporate income taxes make up
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about 10% and then the remaining 5% is comprised of estate taxes excise taxes small random things like customs duty
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and National Park fees and the US government leasing land to cattle Farmers out in Montana like on the show
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Yellowstone stuff like that but basically the upshot is that the US government gets its revenue from taxes
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okay now another big question that's floating around here in this conversation that I have not addressed
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yet and that question is perhaps multifaceted you might be asking this question yourself or heard other you've
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heard others ask it before and and the question is you know how is this system even possible how are we continuing to
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operate at an annual deficit where does the money keep coming from it's it's
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almost like we're snapping our fingers and imagining this money out of thin air
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and then ultimately when will the music stop because since there's no real explanation or at least not an
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explanation that we've heard before that we understand and this all seems to be
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like magical woo woo money surely this charade has an expiration date so to start answering all of those very good
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questions we need to talk a little bit about the Federal Reserve and the treasury and the US debt the US Treasury
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is responsible for managing government finances when the government spends more than it collects in taxes right when it
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operates at that annual deficit that we just talked about the treasury will issue bonds treasury bonds treasury
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notes to borrow money to make up for the difference these bonds are sold to investors to Banks to foreign
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governments and sometimes to the Federal Reserve the money raised from selling those bonds will fund government
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programs will fund infrastructure will fund defense to make up for the annual deficit we know this that's just how it
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works now I mentioned the Federal Reserve in there and that's a term or an organization a part of the government
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that you've probably heard of before uh the Federal Reserve doesn't directly
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fund the government but it can buy and sell treasury bonds out in the open market along with other investors along
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with other institutions as part of the government's overall monetary policy when the FED buys treasuries it inject
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money into the banking system uh which acts to to lower interest rates and make borrowing cheaper when the Federal
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Reserve sells treasuries uh it pulls money out of the overall monetary system which acts to uh raise interest rates
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and tighten Financial conditions we'll get into a little bit of this later but
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as Warren Buffett says interest rates are to the financial system as gravity is to matter the fed's actions and the
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way that it affects interest rates it touches everything and it affects every everything around us from mortgage rates
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to business loans to stock market valuation so as of this podcast recording in February 2025 the Federal
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Reserve currently has about $3.6 trillion do of treasury debt on its balance sheet now through the act of
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buying and selling bonds the FED sets What's called the short-term or the overnight interest rates like literally
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an overnight interest rate the FED can be thought of as the government's bank
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and the FED can loan money to all these independent Banks all over the country like that is how the banking system
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works and these loans are made on an overnight basis and there's an overnight
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interest rate associated with those loans and that overnight interest rate influences how expensive it is for the
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government to borrow or lend money when rates are low the treasury can issue uh debt more cheaply keeping interest
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payments the government's own interest payments more manageable and when interest rates rise the government's
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interest costs increase which can make the national debt more burdensome just a really quick aside on exactly how this
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works the government has all these outstanding bonds that it's issued over the last year or two years or 10 years
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or in some cases even 30 years right there are 20 and 30-year bonds that exist out there that people would have
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bought in 2015 and 2010 and 2005 and 2000 and those bonds have a fixed interest rate according to them maybe
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it's a 2% rate right let's say there was a 2% Bond issued in to you listening right now and 2015 that
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was 10 years ago and it was a 10-year bond and that bond is coming due this year 2025 and the way it's going to work
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is this year the government is going to pay you back the ,000 that you spent to originally buy that bond in 2025 and so
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now in order to pay you that $1,000 the government's already in debt how's the
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government going to do that well it has to borrow a new thousand and it borrows that new thousand by issuing a new Bond
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to some investor who wants to invest in a US treasury bond well what's the current prevailing interest rate it's
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four or 4 a half% we think of this the term that you'll hear is is the debt is
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rolling over and the old Bond the government was servicing that debt at 2% well now the new Bond has to be serviced
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at four or four and a half percent based on wherever the overnight rates are on that particular day okay so now what's
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happened is that the overall US debt payments the interest payments they make on a in a daily or annual basis have
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increased because their old 2% debts essentially got refinanced up to 4 and a half% so that is the the mechanism by
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which over time as you see in the news that interest rates are rising interest rates are rising well the old loans the
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old bonds might still have their lower former interest rates but eventually those bonds are going to have a
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expiration date and money's going to come due and the government's going to
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have to refinance to to pay those out and they're gonna have to refinance at
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whatever the rates are at that time anyway that's the mechanism by which if you did some math in your head earlier I
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was talking about how the government's total interest payment this year is going to be just shy of1 trillion on 36
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trillion in debt and if you do some quick Mental Math you'll realize oh that's something like a
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2.7 2.8 2.9% total interest rate you might be saying like wait I thought the overnight rate right now was like four
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or four and a half percent well the reason why is because there's this balance or spectrum of bonds that exist
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out there some of which are at two or two and a half or 3% others which might be at four or 5% and on average the debt
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is being paid at 2.8 we'll call it anyway the fed's job isn't to keep rates
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low or high instead the FED has a well-known dual mandate their job is to keep unemployment low and also to keep
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inflation low in general low interest rates mean that businesses and the economy can run more smoothly keeping
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Employment High but also potentially triggering higher inflation High interest rates are the opposite it slows
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down the econom potentially hurting employment numbers but also likely tamping down inflation one thing the FED
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does not care about is the national debt or the national annual interest payment
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If the Fed buys large amounts of treasuries injecting more money into the overall monetary system it quite
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literally increases the money supply and contributes to inflation as seen in recent years and inflation or in other
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words it's more money chasing after fewer Goods it has an interesting effect
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on the national debt it should technically make the national debt easier to pay just think about your
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own personal mortgage let's say you borrowed $300,000 in 2015 for a mortgage
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and your monthly payment was $2,000 a month well is $2,000 a month right it's
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a fixed payment and now here in 20125 you've received a decade of raises or inflation raises cost of living raises
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since you initially took out that loan now your household income is considerably higher than it was 10 years
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ago and Meanwhile your mortgage payment is still the same 20 a month your fixed debt became easier to pay off due to
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inflation that monthly debt payment becomes a smaller and smaller fraction of your household income and thus
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becomes easier to pay off some would argue that the national debt has a similar quality about it and this is
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part of an economic theory called modern monetary Theory or mmt mmt is the economic school of thought that says a
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government that prints its own currency just like the US does can never technically run out of money the way a
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household or a business can it's not constrained by revenue or taxes the same
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way that we are constrained by Revenue in our own household finances instead modern monetary Theory mmt argues that
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the real limit on government spending isn't the size of the national debt but
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instead is inflation right inflation is the limit on government spending so if the government needs to fund something
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social programs infrastructure wiping out student loans it can just create the money to do so no need to to find the
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money through higher taxes or through borrowing the only catch of course to just printing infinite money is that
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printing too much money can cause inflation which reduces purchasing power and kind of spiral an economy out of
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control so that's the guard rail in place according to mmt taxes and borrowing exist not to fund spending but
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instead to manage inflation and redistribute wealth to me at least this is all kind of high volutin
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macroeconomic talk I I wouldn't blame you in saying like I'm going to have to
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go back and and listen to that blurb a couple times over to to fully understand it but the whole idea taxes and
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borrowing money which you know the government does don't exist to fund spending but instead only exist to
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manage inflation right we're not worried about spending money that's what mmt
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says because we can always print more money we're not worried about spending
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all we're worried about is having an outof control inflation scenario and that's why we Levy taxes and that's why
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we borrow money or why we have to be careful around those topics is to not reach an outof control inflation
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scenario here's a quick ad and then we'll get back to the show a few of you
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occasionally inquire about two different topics that are actually related the first type of question seeks out details
00:16:40
about my professional life and the wealth management firm that I work for here in Rochester New York the second
00:16:46
type of question involves the best interest which operates with no advertising no pushy sales no pay walls
00:16:52
and the question is how can the best interest stay afloat well to answer both of those questions I want to point you
00:16:58
to episode 78 of the best interest podcast I intentionally recorded episode 78 to shine light on those topics and
00:17:06
inform you how you can actually help the best interest if you're so inclined so
00:17:11
if you've ever been curious about the business of the best interest please go
00:17:15
listen or download episode 78 and let me know what you think now how does this all relate back to the national debt
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well if mmt is true or if we are to believe it's true if we follow those ideas then the national debt isn't
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really a problem at least not in the way that most people think it is the government issues bonds takes on debt as
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a policy choice not as a necessity and since the US controls its own currency since we can print our own money we can
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always pay our debts by printing more dollars the real risk isn't defaulting
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on our debts then it's instead it's it's whether all this money creation will
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overheat the economy and overstimulate inflation to a point when it really gets out of control but what do the critics
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say about modern monetary Theory well mmt says a government can print as much money as it needs as long as inflation
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stays in check critics argue that's like saying you can eat as much cake as you
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want as long as you don't get fat sure in theory there's a limit but in practice governments are bad at knowing
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when to stop or in practice inflation is just too multivariate for a government to easily control as we saw over recent
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years here during you know the postco era there's a public fear aspect to inflation that is self-fulfilling when
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too many people lose faith and start believing that inflation is out of control they understandably decide to
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spend their dollars today rather than wait for inflation to eat away at those dollars value and what does the act of
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spending more dollars today do well think about it it's again it's too many
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dollars chasing too few goods that's the definition of inflation in other words
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the fear of inflation can quite literally cause inflation itself What A Catch 22 now mmt claims that the
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government can control inflation by raising taxes to pull excess money out of the economy but when was the last
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time politicians wanted to raise taxes critics argue that relying on elected officials to suddenly become disciplined
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tax hiking inflation Warriors is simply Wishful dream thinking now right now the
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US borrows money through treasury bonds as we know investors buy them because they trust that the US will repay its
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debts but if the government suddenly starts printing money to cover everything investors might lose faith in
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the dollar itself they're going to start demanding a higher interest rate or
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Worse they're going to stop buying the bonds altogether and that could send borrowing costs soaring through the roof
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weakening the economy again sending inflation potentially out of control anyway back toward the topic at hand I
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do want to revisit one idea that we we mentioned a few minutes ago now whether you believe in mmt or not or whether
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it's true or not I do think that you should walk away from this podcast episode thinking to yourself that the US
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debt is not the same as household debt and the kind of things that you believe about your own household debt do not
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necessarily apply to governmental debt and every time you're at a barbecue where someone is trying to explain how
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we're $36 trillion in debt and what would you think if your house was $36 trillion in debt or another one of my
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favorites uh another one of my favorite bits of math is it's it's understandable
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if you take the national debt and you divide it by our population each citizen here is in
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$300,000 of debt via the government every time you hear something like that some analogy some for some comparison
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like that I hope this podcast episode helps you walk away realizing okay that sounds a little bit scary but it's just
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not true it's just a simply a bad bad metaphor why okay let's discuss why if
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you or I rack up too much debt we eventually have to pay it back or we go bankrupt now the US government is not
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the same as we explained a few minutes ago it can just keep on rolling over its debt issuing new bonds to replace the
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old ones as long as investors trust the government and as long as inflation is under control this cycle can go on
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indefinitely in fact the US has never paid off its debt completely even after World War II when the debt to GDP ratio
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was well over 100% And we had an annual Surplus in our budget we still didn't
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use that Surplus to pay off our debt instead the US policy makers chose to grow the economy so that the debt became
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a smaller percentage of the overall pie isn't that an interesting fact right the
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US has never paid off its de and so again if we're worried about the current state of the debt I I do get it
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I totally understand where that fear comes from but I think it's worth understanding that at any time in the
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past 250 years we could have sat here saying I don't like the fact that we're
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in national debt this were a household we wouldn't be in good shape we have too
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much debt and we need to pay it off well we've never paid it off and I think
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we're doing okay it's worth keeping that in mind now yes a household running a
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deficit month after month is in trouble but a government running a deficit is not necessarily in the same trouble
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deficits mean that the government is spending more than it collects in taxes we know this but that money is still
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circulating around the economy often fueling growth if spending boosts productivity if it boosts infrastructure
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spending or social stability then it can actually make the economy stronger I suppose the analogy here would be if a
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bunch of local families personal families were all quote unquote in debt but they were all using that personal
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debt to spend money at one another's businesses the businesses that they owned themselves well those businesses
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would be flourishing and sooner or later they could use their business proceeds to pay off their personal debts that's
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kind of the same way in which as long as government spending is stimulating the American economy all that money is kind
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of still flowing around the same exact economy and it's all flowing in a positive direction now it's interesting
00:22:49
though most of the arguments or points that I'm making today they all fit under
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this category of well the debt is not necessarily a bad thing but that does beg a question at least to me if it's
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not a bad thing then it's a good thing well I'm not sure like genuinely I don't
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have a PhD in economics and when you pull the people who do you get a wide spectrum of answers but if we had to
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make an argument in favor of giant US debt it would go as follows first government debt creates private wealth
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for every dollar that the government borrows someone else holds that debt as an asset treasury bonds as we know are
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one of the foundations of the Global Financial system Banks Pension funds insurance companies individuals all rely
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on them as a safe interest bearing investment in other words the government's debt is the private sector
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savings if the US eliminated its debt tomorrow that would mean wiping out trillions of dollars in assets that
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people and institutions rely on for Financial Security for a foundation for a safety net the second reason deficits
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fuel economic growth we just kind of dipped our toe into this the government spends more than it takes in well that
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might be good it means that more money is flowing into the economy creating jobs funding infrastructure supporting
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Innovation when the private sector slows down like during a recession governmental borrowing can step in to
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keep up demand historically deficit spending has been crucial in times of Crisis like the New Deal during the
00:24:10
Great Depression or stimulus packages after 2008 and co9 without those we might be looking at a a bigger or a more
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real economic collapse the third reason is borrowing at near zero cost so would you in your own life take out a mortgage
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at 0% interest prob it it usually makes a lot of sense to do so you'd get access
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to money with no downside well for much of recent history granted Maybe not today but much of recent history the US
00:24:37
has borrowed at incredibly low rates investors are so eager to hold us debt because it is so secure that they accept
00:24:44
returns barely above inflation if you can borrow money cheaply to invest in things like infrastructure education and
00:24:51
Technology things that boost long-term societal productivity I'm not sure that's a problem it sounds like smart
00:24:57
economics instead the fourth reason we don't really need to pay it off ever people act like the US national debt is
00:25:04
a credit card bill but it's not the US just rolls over the debt indefinitely as
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we already explained earlier as long as the economy grows faster than the debt which it historically has done then the
00:25:16
burden of that debt shrinks over time it goes back to our mortgage analogy right
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we took out a mortgage in 2015 it was $2,000 a month here in 2025 paying $2,000 a month is much more manageable
00:25:27
that analog ology applies to the US national debt after World War II we already mentioned debt to GDP was over
00:25:34
100% but instead of paying off the debt the economy grew that's how we Ed the
00:25:38
proceeds wages Rose the debt became a smaller burden in the overall pie of governmental spending problem solved and
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then the last reason the alternative to having a large national debt might be a worse alternative what if the government
00:25:54
ran a balanced budget every year it would either have to tax people more taking more money out of the economy or
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cut spending which hurts growth hurts education hurts healthare hurts defense either way you get a weaker economy if
00:26:07
people want a strong economy stable financial markets continued Global Leadership government debt isn't just
00:26:12
necessary it might even be desirable so well I don't think we've solved national
00:26:18
debt through all these ideas today I think and I hope I've done a good job explaining to you all what's going on
00:26:24
and why it's going on and some of the arguments whether it's good or bad and I
00:26:28
hope I've late to rest the idea that the national debt should be compared to a
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household debt if your household could print your own money to pay off your debt then you can compare it but since
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none of us have that printing machine in our basements the comparison simply does
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not make sense so let's transition then to what the national debt means for you
00:26:45
a smart long-term investor who's thinking about your own financial plan interest rates as we talked about before
00:26:51
are the most fundamental force in the economy kind of like gravity for for money as Warren Buffett would say just
00:26:58
as gravity pulls objects towards the Earth interest rates pull money toward different uses shaping everything from
00:27:04
personal finance to Global markets when interest rates are low you can think of money being lighter right less heavy
00:27:10
borrowing is cheap businesses expand home buyers take on bigger mortgages investors move money into stocks and
00:27:16
riskier assets in search of better returns economic activity accelerates just like an object floating in Low
00:27:21
Gravity but when interest rates rise money gets heavier loans become more expensive businesses slow down
00:27:27
investment home buyers pause investors Retreat to safer assets like bonds the economy cools down just as gravity keeps
00:27:34
thing from drifting endlessly into space now the Federal Reserve acts like the the master of gravity if you will
00:27:41
adjusting rates to keep the economy balanced if growth is too slow they lower rates to encourage spending if
00:27:46
inflation runs too hot they raise rates to slow things down interest rates also determine the value of money over time a
00:27:52
dollar today is not the same as a dollar in 10 years and the rate at which we discount that dollar in 10 years well we
00:27:59
should probably just use the standard interest rate the governmental interest rate to do that discounting so whether
00:28:04
you're borrowing for a home saving for retirement watching the stock market interest rates are the invisible force
00:28:10
shaping everything around us you might not always feel it but just like gravity it's always there pushing pulling
00:28:16
keeping the economy in motion now interest rates obviously have a major pull on our personal finances and now
00:28:22
the next topic related to the national debt and our personal finances are taxes whether you or me or policy makers
00:28:29
believe in modern monetary Theory or not I think we all have to admit that we could see a future reality where the
00:28:34
public conversation become something like you know this national debt is simply too crazy and now everyone is
00:28:40
going to have to pay more taxes because of it if that conversation comes to pass
00:28:44
you better believe that life is going to get more expensive what can we do to protect ourselves from those potential
00:28:50
higher taxes my personal answer and the answer that I give to my clients and the
00:28:54
answer i' give to you involves tax diversification in your long-term investing accounts okay what do I mean
00:28:59
by that well many of us listening have options on where to save our money perhaps it's in a traditional 401k or an
00:29:05
irra or in the Roth version of those accounts or in a health savings account or in a simple taxable brokerage as
00:29:13
we've discussed here on the podcast on the best interest blog at length these
00:29:17
accounts all have different pros and cons and different tax treatments some have no future taxes some are taxed as
00:29:25
ordinary income some get taxed minimally if you're old overall income is low but
00:29:29
then get taxed more if your overall income becomes High the summary though is that the money that you have in these
00:29:35
different tax buckets gives you an option for how you want to withdraw that money in the future in your retirement
00:29:41
when we don't know what the taxes will be like but we're talking this about
00:29:45
this idea right now that maybe the taxes will be much higher it's nice in that
00:29:49
situation if you have some dials to turn depending on what the national and state
00:29:53
tax policy looks like I mean the analogy I always give is if we look at the current political IAL climate in general
00:30:00
right-wing conservative Republicans generally want to lower taxes leftwing liberal Democrats generally want to
00:30:07
raise taxes so let's just take that as a rule of thumb not that it's always the
00:30:12
case but let's just take it as a rule of thumb and let's imagine for the rest of
00:30:16
our lives every four years the political parties flip-flop Democrat Republican Democrat Republican and as they
00:30:23
flip-flop it's taxes go up taxes go down taxes go up taxes go down well if you have a a portfolio put
00:30:31
together involving some of these different accounts that I just talked about when taxes go up I'm going to pull
00:30:37
money more out of my Roth account because there's no taxes due and I'm probably going to pull money out of my
00:30:42
taxable account at least some of money out of my taxable account because as long as I keep my overall income low I'm
00:30:48
going to pay 0% capital gains taxes there but then during the Republican years when they come in and they want to
00:30:55
lower taxes well at lower tax rates I can stomach the idea of paying income taxes so those might be the years when I
00:31:02
pull money out of my traditional investment accounts you know what I'd rather pay income taxes during those
00:31:07
years I'm going to have to pay the taxes eventually anyway so that's the idea
00:31:10
behind that tax diversification here's a quick ad and then we'll get back to the
00:31:15
show every week I send a quick free email to thousands of readers that shares three Simple Things One my new
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articles and podcasts two the best financial content of the week from all over the internet and three a financial
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chart that explains some important Concept in the news that week it's a great primer to boost your financial
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knowhow but Jesse I don't want another email well this might not be for you but
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I do hear you which is why I make it very short sweet and full of only the essentials a whopping 66% of subscribers
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homepage at bestin interest.com blog again that's a free no strings attached
00:32:00
subscription at bestter interest. blog now another big topic that affects us all and has to do with the national debt
00:32:07
is inflation perhaps we're already living through a period where major decisions at the federal level
00:32:11
surrounding debt and printing money have affected inflation we've all been to the
00:32:15
grocery store we all know how our eggs and and blueberries have gone up in price and ideally if we want to insulate
00:32:21
ourselves from national debt problems part of the solution is shielding yourself from inflation as best you can
00:32:26
to me the tool want to wield here is my Investment Portfolio I'm going to link
00:32:31
an article in the show notes about what kind of Investments at least historically have fared well against
00:32:36
inflation granted it was to answer a specific question about the postco era so we only looked at data from like 2020
00:32:43
to 2022 but long story short if we're talking about how to position our portfolio to combat inflation the answer
00:32:51
is definitely not Bonds and cash even high yield cash accounts right if the value of a dollar
00:32:58
is decreasing around us which is what inflation does then the last thing we want is an investment instrument that is
00:33:04
paying us a fixed income of dollars and and there's a reason why even though you
00:33:09
can get a a 4% from a high yield savings account right now in early 2025 is genuinely a bad idea to keep too much of
00:33:16
your money in cash it pains me every time someone says yeah I know there's inflation and sometimes stocks do well
00:33:22
but I've got half my money earning 4% in a money market right now that's pretty
00:33:25
darn good yeah I mean 4% is better than 1% I agree with you there but it's also
00:33:31
not going to stay at 4% forever it's definitely going to lose ground to inflation over the long run and
00:33:37
meanwhile the probabilities are that a diversified stock allocation is going to crush whatever returns you're getting
00:33:42
there so again to summarize that cash and bonds are not a good investment to combat inflation there are other reasons
00:33:50
to hold cash and bonds right we we talk about this all the time and I don't want
00:33:53
to beat a dead horse here but the reason to have cash and bonds is because they're stable for money that you know
00:33:59
you're going to need in the short run and essentially the logic there is we say yeah I I know over the next couple
00:34:04
years I understand that my bond allocation is probably going to lose some ground to inflation I'm willing to
00:34:11
stomach that cost because the benefit I get is the stability from the cash or the bonds to spend on these things that
00:34:19
I know I'm going to spend in the next couple years I'm willing to trade that
00:34:23
stability against the cost of losing a little bit of ground to inflation but over five or 10 or 20 years personally
00:34:30
at least that is not a trade I'm willing to make okay so what is a trade I'm
00:34:34
willing to make or what is an investment that I want to pursue to combat inflation well some people would say
00:34:39
that the anti-inflation investment is real estate maybe I will say though in our recent bout of inflation real estate
00:34:45
ended up being a terrible hedge the reason there likely has much more to do with covid which crushed the commercial
00:34:51
real estate market than it has to do with inflation on the surface at least I can definitely buy the argument that
00:34:57
over time real estate prices will rise with overall inflation making real estate a good a decent hedge against
00:35:04
inflation but really at the end of the day I look at stocks another good idea because as businesses and again stocks
00:35:12
are nothing more than businesses as businesses face Rising costs as their costs increase due to inflation they can
00:35:19
pass those costs onto their customers in the form of rising prices their earnings
00:35:23
will increase their margin stay stable and in a nutshell you get Rising stock prices to coincide with increasing
00:35:31
inflation if inflation Chomps away at us it's also likely going to negatively
00:35:36
affect social security and yes there are Cola cost of living increases to Social
00:35:40
Security and they are there to help keep up with inflation and they typically do
00:35:44
a decent job at that but one thing I suspect we'll never see is a cola increase that outpaces inflation so
00:35:51
again if we want to position our stock portfolio to combat the potential inflation that's going to be a ram
00:35:57
ification of this national debt essentially I go back to just goals-based investing and I say over the
00:36:03
short run I want to hold Bonds in cash I know it'll lose ground to inflation but
00:36:07
at least it's going to be there stable for me for my short-term spending needs
00:36:11
and then over the long run over these long periods of time where yeah I'm really worried about how inflation might
00:36:17
eat away at my portfolio over 10 or 20 or 30 years well that's where a stock
00:36:22
allocation again historically we can look at the historical data and we can see that stocks have provided a real
00:36:28
inflation adjusted positive return over long timelines like that they outpace inflation but then even if we take a
00:36:35
step back and just look at it theoretically and say well why do we expect that to be the case in the future
00:36:39
how do stocks outperform inflation why might that continue again in subsequent years the answer is because the
00:36:46
businesses that underly stocks have ways of passing inflation costs onto the consumer keeping their margins and their
00:36:54
earnings positive and that ultimately is what provides us with our positive stock
00:36:59
return now something that we can do in our personal finances that uses debt to our advantage is that we can potentially
00:37:04
lock in debt inside our lives when rates are low it's much easier said than done
00:37:09
and and some of it just has to do with the timing of our own lives I know that taking on debt can be a sharp
00:37:14
double-edged sword against us but when I work with someone who has their forever
00:37:19
home locked in at a 2.5% mortgage that they got in 2018 wow that's pretty awesome now other than the incredibly
00:37:26
low rate the key here again is that the rate is fixed it's the same Principle as
00:37:30
to why we don't want to invest in bonds over long periods of inflation we don't
00:37:34
want to buy someone else's debt the same principle is why we don't mind taking on
00:37:38
debt during those periods we already covered that idea today right your fixed monthly or yearly debt payment becomes
00:37:45
easier and easier to pay over time now lastly but certainly importantly we need to think about our own household income
00:37:52
our careers and our earnings potentials and how they are kind of related to this
00:37:57
what if the national debt affects us personally conversation so much of what we're talking about here today is is
00:38:02
simply out of our control but perhaps the financial dial that we have the most control over is our own earnings
00:38:08
potential now that dial is definitely challenging to turn in the short run it's a little bit of a pet peeve of mine
00:38:14
when I'll I'll see someone in the financial content creation space especially I mean this is like an
00:38:19
Instagram or a Tik Tok or like a Twitter thing that I'll see and someone will
00:38:23
just say it's easy just to increase your income well okay that's really hard dial
00:38:28
to turn over the short run obviously if it was easy to go out and double your income tomorrow why wouldn't you be
00:38:34
doing it right I mean that enough is proof to say that it's not easy to do but it is within our locus of control
00:38:41
and whether that means having some hard conversations with your boss going out and pursuing a degree or a certification
00:38:47
starting a little side Hobby and seeing where it goes now none of these paths are necessarily easy they can't
00:38:53
necessarily be done overnight but they are worth exploring again you're not not
00:38:57
going to be able to dictate federal tax policy or the prices at the grocery store or the returns from your stock
00:39:02
portfolio you're just going to have to deal with the cards that you're dealt
00:39:05
there but you can have a more direct control over your long-term earnings More Money More income doesn't
00:39:12
necessarily lead to more happiness but it certainly buys you flexibility in this world and that's worth pursuing at
00:39:18
the end of the day the US national debt is complex but it's not the same as household debt the government is not a
00:39:24
family sitting around the kitchen table balancing a checkbook it operates under entirely different rules some experts
00:39:30
argue that the debt actually fuels growth others warn of future consequences and most recognize that
00:39:35
it's not as simple as good or bad to have national debt or to be operating at
00:39:40
a at an annual deficit now what does it all mean for you in your personal lives well we should keep an eye on interest
00:39:46
rates as they impact everything around us from mortgage payments to stock valuations we should understand that the
00:39:51
government debt and economic growth are deeply connected meaning policy decisions can affect your Investments
00:39:57
and your financial future but in my opinion we shouldn't get caught up in fear-driven headlines or kind of these
00:40:03
overblown political arguments that go on at the end of the day we should control
00:40:07
what we can control and a well- diversified long-term investment plan remains in my opinion the best way to
00:40:14
navigate economic uncertainty along with uh our own ability to control our earnings and build our own careers as
00:40:21
best we can the us our government we have carried debt since our Inception it's part of our DNA and unless
00:40:27
something drastic changes it will continue to be that way so the real question is not will we pay off our debt
00:40:33
but rather how will we manage it and more importantly for you listening how can you position yourself to thrive no
00:40:39
matter what thanks for tuning in to this episode of personal finance for long-term investors if you have a
00:40:45
question for Jesse to answer on a future episode send him an email over at his Blog the best interest his email address
00:40:52
is Jesse besin interest. blog again that's Jesse best interest. blog did you
00:40:59
enjoy the show subscribe rate and review the podcast wherever you listen this helps others find the show and invest in
00:41:06
knowledge themselves and we really appreciate it we'll catch you on the next episode of personal finance for
00:41:12
long-term investors personal finance for long-term investors is a personal podcast meant for education and
00:41:18
entertainment it should not be taken as Financial advice and it's not prescriptive of your financial situation
