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welcome to personal finance for
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long-term investors where we believe
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Benjamin Franklin's advice that an
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investment in knowledge pays the best
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interest both in finances and in your
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life every episode teaches you personal
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finance and long-term investing in
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simple terms now here's your host Jesse
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Kramer hello and welcome to episode 102
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of personal finance for long-term
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investors my name is Jesse Kramer if the
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US government was a household would it
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be drowning in debt or simply managing a
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a big mortgage or does that analogy
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between the government and a household
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not make any sense at all and perhaps we
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need to rethink and correct the way we
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conceptualize government debt today
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we're going to dive deep on the US
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national debt ultimately we're going to
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discuss how the national debt actually
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impacts your daily life your Investments
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and your financial future but to get
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there we're first going to explain how
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we got here why we keep going deeper
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into debt on what seems like an annual
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basis why experts simply aren't that
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concerned about the national debt
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whatsoever why the US national debt is
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fundamentally different than household
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debt I guess I didn't really bury the
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lead there too much did I on what the
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path forward out of debt looks like long
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story short my goal here today is that
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each of you leave this podcast episode
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feeling like you understand the US
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national debt situation significantly
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better than you might understand it
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right now and if need be perhaps you'll
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make some changes on the personal side
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of your Ledger based on what you learn
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here today so let's let break down Uncle
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Sam's debt situation connect the dots to
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personal finance and long-term investing
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but first a quick review of the week
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this one comes from ashb who left us a
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five-star review on Apple podcast and
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said excellent pod Jesse does an
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incredible job of breaking down complex
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Financial topics into easy to understand
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language I'm a big believer that
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successfully navigating Financial
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Planning and investing is a relatively
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simple process it's Wall Street that
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wants us all to believe it's so
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complicated Jesse does a nice job
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cutting through the noise well thank you
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very much ashb and thanks to all of you
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who leave your kind words or five-star
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reviews on your podcast players Ashby
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when you hear this drop me an email to
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Jesse bestter interest. blog and I'll
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send you a super soft best-interest
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t-shirt okay back to the national debt
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the US has carried debt since its very
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Inception debts incurred during the
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American Revolution that's the 1770s for
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you playing at home during the
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Revolutionary War amounted to $75
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million in debt primarily borrowed from
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some domestic investors mainly from the
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French government to help the rebels as
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it were buy some War materials and then
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fast forward to today our debt stands at
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$ 36 trillion as I record this in
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February of 2025 by the time you're
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hearing these words who knows where
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it'll be 36 trillion and change will say
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you know just a little bit of change on
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top of 36 trillion and that US debt it's
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broken down into two main components the
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first is what's called intra
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governmental or within the government
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itself a good example of that is uh
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currently that the US government owes
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debts to Social Security and Medicare
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there were many years during the 20th
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century mainly where as an example
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Social Security took in more tax dollars
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than it paid out in benefits right there
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was a surplus an annual surplus of
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Social Security money during those years
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and somewhere on the government's books
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in its accounting Social Security lent
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those surpluses to other governmental
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wings and now the government owes a debt
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back to Social Security we can kind of
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easily use right here that that common
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metaphor of the left pocket owing money
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to the right pocket the government owes
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money to itself it's not quite the same
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as a real debt it's a debt on paper but
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it's all under the umbrella of the US
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government and in that way we shouldn't
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really count it but once we go beyond
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intergovernmental debt though now we get
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to the debt held by the public or debt
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that the government owes to anything and
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anyone who's not the government it's
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outside of the government's umbrella of
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the 36 trillion in debt about 7 trillion
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of it is intragovernmental which means
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that the other 29 trillion is owed to
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entities outside of the government of
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that 29 trillion that's owed outside the
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government and we are going to spend a
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good amount of time explaining exactly
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what's going on there roughly 25% of
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that debt is owned by foreign countries
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and the remainder is owned domestically
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here in the USA but okay exactly what
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what does does that mean how does
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another country own our debt or actually
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for that matter how do we own our own
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debt what does that really look like in
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practice and the simple answer here and
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it is a simple answer is treasury bonds
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or treasury bills or treasury notes
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we've talked about here before on the
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podcast how bonds are simply the act of
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owning someone else's debt you can
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corporations all the time or or
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governmental bodies your local County
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the state they issue bonds to to raise
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money right they need to raise money
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somehow and they borrow money by issuing
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Bond someone else buys the bond and says
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I will buy the bond for $1,000 it's a
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loan you owe me the $1,000 back plus
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interest over time that's what a bond is
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and treasury bonds are the form of the
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US government's debt if you own a
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treasury bond which almost all of us
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probably do somewhere in our portfolio
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then the US government is indebted to
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you and right now there are about 2829
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trillion in US Treasury Bonds in
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existence again 20 to 25% of those are
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owned by foreign countries and foreign
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investors and the remainder are owned by
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domestic investors and domestic
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institutions as investors we all know
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that bonds pay us interest so yes that
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means that the US government is paying
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interest on the debt that it owes us in
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fact in 2025 that total interest payment
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is likely to approach $1
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trillion now on an annual basis does the
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debt grow or Shrink and why well in
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recent decades it's done nothing but
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grow and the simple reason is that as a
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country we spend more than we earn and
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then our debt increases that's a
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principle that yes should make total
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sense to us on a personal finance level
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it's about a budget in 2024 the US
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government budget had
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6.75 trillion of spending but only
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estimated about $ 4.92 trillion in
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Revenue that results in a $1.8 trillion
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deficit for the year of 2024 or in other
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words our total national debt increased
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by about $1.8 trillion okay the next
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common question that might come up is
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where does the US Revenue come from the
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biggest answer by far is taxes
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individual income taxes Medicare taxes
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and Social Security taxes make up about
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80 to 85% of the US government's annual
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revenue corporate income taxes make up
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about 10% and then the remaining 5% is
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comprised of estate taxes excise taxes
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small random things like customs duty
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and National Park fees and the US
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government leasing land to cattle
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Farmers out in Montana like on the show
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Yellowstone stuff like that but
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basically the upshot is that the US
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government gets its revenue from taxes
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okay now another big question that's
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floating around here in this
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conversation that I have not addressed
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yet and that question is perhaps
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multifaceted you might be asking this
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question yourself or heard other you've
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heard others ask it before and and the
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question is you know how is this system
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even possible how are we continuing to
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operate at an annual deficit where does
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the money keep coming from it's it's
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almost like we're snapping our fingers
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and imagining this money out of thin air
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and then ultimately when will the music
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stop because since there's no real
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explanation or at least not an
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explanation that we've heard before that
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we understand and this all seems to be
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like magical woo woo money surely this
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charade has an expiration date so to
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start answering all of those very good
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questions we need to talk a little bit
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about the Federal Reserve and the
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treasury and the US debt the US Treasury
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is responsible for managing government
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finances when the government spends more
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than it collects in taxes right when it
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operates at that annual deficit that we
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just talked about the treasury will
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issue bonds treasury bonds treasury
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notes to borrow money to make up for the
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difference these bonds are sold to
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investors to Banks to foreign
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governments and sometimes to the Federal
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Reserve the money raised from selling
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those bonds will fund government
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programs will fund infrastructure will
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fund defense to make up for the annual
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deficit we know this that's just how it
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works now I mentioned the Federal
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Reserve in there and that's a term or an
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organization a part of the government
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that you've probably heard of before uh
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the Federal Reserve doesn't directly
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fund the government but it can buy and
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sell treasury bonds out in the open
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market along with other investors along
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with other institutions as part of the
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government's overall monetary policy
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when the FED buys treasuries it inject
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money into the banking system uh which
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acts to to lower interest rates and make
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borrowing cheaper when the Federal
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Reserve sells treasuries uh it pulls
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money out of the overall monetary system
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which acts to uh raise interest rates
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and tighten Financial conditions we'll
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get into a little bit of this later but
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as Warren Buffett says interest rates
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are to the financial system as gravity
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is to matter the fed's actions and the
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way that it affects interest rates it
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touches everything and it affects every
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everything around us from mortgage rates
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to business loans to stock market
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valuation so as of this podcast
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recording in February 2025 the Federal
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Reserve currently has about $3.6
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trillion do of treasury debt on its
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balance sheet now through the act of
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buying and selling bonds the FED sets
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What's called the short-term or the
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overnight interest rates like literally
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an overnight interest rate the FED can
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be thought of as the government's bank
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and the FED can loan money to all these
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independent Banks all over the country
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like that is how the banking system
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works and these loans are made on an
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overnight basis and there's an overnight
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interest rate associated with those
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loans and that overnight interest rate
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influences how expensive it is for the
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government to borrow or lend money when
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rates are low the treasury can issue uh
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debt more cheaply keeping interest
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payments the government's own interest
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payments more manageable and when
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interest rates rise the government's
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interest costs increase which can make
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the national debt more burdensome just a
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really quick aside on exactly how this
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works the government has all these
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outstanding bonds that it's issued over
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the last year or two years or 10 years
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or in some cases even 30 years right
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there are 20 and 30-year bonds that
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exist out there that people would have
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bought in 2015 and 2010 and 2005 and
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2000 and those bonds have a fixed
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interest rate according to them maybe
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it's a 2% rate right let's say there was
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a 2% Bond issued in
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to you listening right now and 2015 that
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was 10 years ago and it was a 10-year
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bond and that bond is coming due this
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year 2025 and the way it's going to work
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is this year the government is going to
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pay you back the ,000 that you spent to
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originally buy that bond in 2025 and so
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now in order to pay you that $1,000 the
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government's already in debt how's the
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government going to do that well it has
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to borrow a new thousand and it borrows
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that new thousand by issuing a new Bond
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to some investor who wants to invest in
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a US treasury bond well what's the
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current prevailing interest rate it's
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four or 4 a half% we think of this the
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term that you'll hear is is the debt is
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rolling over and the old Bond the
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government was servicing that debt at 2%
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well now the new Bond has to be serviced
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at four or four and a half percent based
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on wherever the overnight rates are on
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that particular day okay so now what's
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happened is that the overall US debt
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payments the interest payments they make
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on a in a daily or annual basis have
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increased because their old 2% debts
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essentially got refinanced up to 4 and a
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half% so that is the the mechanism by
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which over time as you see in the news
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that interest rates are rising interest
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rates are rising well the old loans the
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old bonds might still have their lower
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former interest rates but eventually
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those bonds are going to have a
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expiration date and money's going to
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come due and the government's going to
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have to refinance to to pay those out
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and they're gonna have to refinance at
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whatever the rates are at that time
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anyway that's the mechanism by which if
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you did some math in your head earlier I
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was talking about how the government's
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total interest payment this year is
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going to be just shy of1 trillion on 36
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trillion in debt and if you do some
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quick Mental Math you'll realize oh
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that's something like a
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2.7 2.8 2.9% total interest rate you
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might be saying like wait I thought the
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overnight rate right now was like four
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or four and a half percent well the
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reason why is because there's this
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balance or spectrum of bonds that exist
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out there some of which are at two or
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two and a half or 3% others which might
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be at four or 5% and on average the debt
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is being paid at 2.8 we'll call it
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anyway the fed's job isn't to keep rates
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low or high instead the FED has a
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well-known dual mandate their job is to
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keep unemployment low and also to keep
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inflation low in general low interest
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rates mean that businesses and the
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economy can run more smoothly keeping
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Employment High but also potentially
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triggering higher inflation High
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interest rates are the opposite it slows
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down the econom potentially hurting
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employment numbers but also likely
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tamping down inflation one thing the FED
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does not care about is the national debt
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or the national annual interest payment
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If the Fed buys large amounts of
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treasuries injecting more money into the
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overall monetary system it quite
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literally increases the money supply and
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contributes to inflation as seen in
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recent years and inflation or in other
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words it's more money chasing after
00:13:55
fewer Goods it has an interesting effect
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on the national debt
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it should technically make the national
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debt easier to pay just think about your
00:14:04
own personal mortgage let's say you
00:14:05
borrowed $300,000 in 2015 for a mortgage
00:14:08
and your monthly payment was $2,000 a
00:14:10
month well is $2,000 a month right it's
00:14:13
a fixed payment and now here in 20125
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you've received a decade of raises or
00:14:19
inflation raises cost of living raises
00:14:21
since you initially took out that loan
00:14:23
now your household income is
00:14:24
considerably higher than it was 10 years
00:14:26
ago and Meanwhile your mortgage payment
00:14:28
is still the same 20 a month your fixed
00:14:30
debt became easier to pay off due to
00:14:32
inflation that monthly debt payment
00:14:34
becomes a smaller and smaller fraction
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of your household income and thus
00:14:38
becomes easier to pay off some would
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argue that the national debt has a
00:14:41
similar quality about it and this is
00:14:43
part of an economic theory called modern
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monetary Theory or mmt mmt is the
00:14:49
economic school of thought that says a
00:14:51
government that prints its own currency
00:14:53
just like the US does can never
00:14:55
technically run out of money the way a
00:14:57
household or a business can it's not
00:14:59
constrained by revenue or taxes the same
00:15:02
way that we are constrained by Revenue
00:15:04
in our own household finances instead
00:15:07
modern monetary Theory mmt argues that
00:15:09
the real limit on government spending
00:15:11
isn't the size of the national debt but
00:15:14
instead is inflation right inflation is
00:15:16
the limit on government spending so if
00:15:19
the government needs to fund something
00:15:20
social programs infrastructure wiping
00:15:22
out student loans it can just create the
00:15:24
money to do so no need to to find the
00:15:27
money through higher taxes or through
00:15:29
borrowing the only catch of course to
00:15:31
just printing infinite money is that
00:15:33
printing too much money can cause
00:15:34
inflation which reduces purchasing power
00:15:37
and kind of spiral an economy out of
00:15:39
control so that's the guard rail in
00:15:41
place according to mmt taxes and
00:15:45
borrowing exist not to fund spending but
00:15:48
instead to manage inflation and
00:15:50
redistribute wealth to me at least this
00:15:53
is all kind of high volutin
00:15:54
macroeconomic talk I I wouldn't blame
00:15:56
you in saying like I'm going to have to
00:15:57
go back and and listen to that blurb a
00:15:59
couple times over to to fully understand
00:16:01
it but the whole idea taxes and
00:16:03
borrowing money which you know the
00:16:05
government does don't exist to fund
00:16:07
spending but instead only exist to
00:16:09
manage inflation right we're not worried
00:16:12
about spending money that's what mmt
00:16:14
says because we can always print more
00:16:15
money we're not worried about spending
00:16:17
all we're worried about is having an
00:16:19
outof control inflation scenario and
00:16:21
that's why we Levy taxes and that's why
00:16:23
we borrow money or why we have to be
00:16:25
careful around those topics is to not
00:16:27
reach an outof control inflation
00:16:29
scenario here's a quick ad and then
00:16:32
we'll get back to the show a few of you
00:16:34
occasionally inquire about two different
00:16:36
topics that are actually related the
00:16:38
first type of question seeks out details
00:16:40
about my professional life and the
00:16:42
wealth management firm that I work for
00:16:43
here in Rochester New York the second
00:16:46
type of question involves the best
00:16:47
interest which operates with no
00:16:49
advertising no pushy sales no pay walls
00:16:52
and the question is how can the best
00:16:53
interest stay afloat well to answer both
00:16:56
of those questions I want to point you
00:16:58
to episode 78 of the best interest
00:17:01
podcast I intentionally recorded episode
00:17:03
78 to shine light on those topics and
00:17:06
inform you how you can actually help the
00:17:08
best interest if you're so inclined so
00:17:11
if you've ever been curious about the
00:17:13
business of the best interest please go
00:17:15
listen or download episode 78 and let me
00:17:18
know what you think now how does this
00:17:20
all relate back to the national debt
00:17:22
well if mmt is true or if we are to
00:17:25
believe it's true if we follow those
00:17:26
ideas then the national debt isn't
00:17:29
really a problem at least not in the way
00:17:30
that most people think it is the
00:17:32
government issues bonds takes on debt as
00:17:34
a policy choice not as a necessity and
00:17:37
since the US controls its own currency
00:17:39
since we can print our own money we can
00:17:41
always pay our debts by printing more
00:17:43
dollars the real risk isn't defaulting
00:17:46
on our debts then it's instead it's it's
00:17:48
whether all this money creation will
00:17:50
overheat the economy and overstimulate
00:17:53
inflation to a point when it really gets
00:17:55
out of control but what do the critics
00:17:56
say about modern monetary Theory well
00:17:59
mmt says a government can print as much
00:18:01
money as it needs as long as inflation
00:18:03
stays in check critics argue that's like
00:18:05
saying you can eat as much cake as you
00:18:07
want as long as you don't get fat sure
00:18:09
in theory there's a limit but in
00:18:11
practice governments are bad at knowing
00:18:12
when to stop or in practice inflation is
00:18:15
just too multivariate for a government
00:18:17
to easily control as we saw over recent
00:18:20
years here during you know the postco
00:18:21
era there's a public fear aspect to
00:18:24
inflation that is self-fulfilling when
00:18:26
too many people lose faith and start
00:18:28
believing that inflation is out of
00:18:29
control they understandably decide to
00:18:32
spend their dollars today rather than
00:18:34
wait for inflation to eat away at those
00:18:36
dollars value and what does the act of
00:18:39
spending more dollars today do well
00:18:41
think about it it's again it's too many
00:18:43
dollars chasing too few goods that's the
00:18:45
definition of inflation in other words
00:18:47
the fear of inflation can quite
00:18:49
literally cause inflation itself What A
00:18:52
Catch 22 now mmt claims that the
00:18:55
government can control inflation by
00:18:57
raising taxes to pull excess money out
00:19:00
of the economy but when was the last
00:19:02
time politicians wanted to raise taxes
00:19:05
critics argue that relying on elected
00:19:07
officials to suddenly become disciplined
00:19:09
tax hiking inflation Warriors is simply
00:19:13
Wishful dream thinking now right now the
00:19:16
US borrows money through treasury bonds
00:19:17
as we know investors buy them because
00:19:19
they trust that the US will repay its
00:19:21
debts but if the government suddenly
00:19:23
starts printing money to cover
00:19:24
everything investors might lose faith in
00:19:27
the dollar itself they're going to start
00:19:28
demanding a higher interest rate or
00:19:30
Worse they're going to stop buying the
00:19:31
bonds altogether and that could send
00:19:33
borrowing costs soaring through the roof
00:19:36
weakening the economy again sending
00:19:38
inflation potentially out of control
00:19:40
anyway back toward the topic at hand I
00:19:42
do want to revisit one idea that we we
00:19:45
mentioned a few minutes ago now whether
00:19:47
you believe in mmt or not or whether
00:19:49
it's true or not I do think that you
00:19:51
should walk away from this podcast
00:19:53
episode thinking to yourself that the US
00:19:55
debt is not the same as household debt
00:19:58
and the kind of things that you believe
00:19:59
about your own household debt do not
00:20:02
necessarily apply to governmental debt
00:20:04
and every time you're at a barbecue
00:20:06
where someone is trying to explain how
00:20:08
we're $36 trillion in debt and what
00:20:10
would you think if your house was $36
00:20:12
trillion in debt or another one of my
00:20:14
favorites uh another one of my favorite
00:20:15
bits of math is it's it's understandable
00:20:17
if you take the national debt and you
00:20:19
divide it by our population each citizen
00:20:21
here is in
00:20:22
$300,000 of debt via the government
00:20:25
every time you hear something like that
00:20:27
some analogy some for some comparison
00:20:29
like that I hope this podcast episode
00:20:31
helps you walk away realizing okay that
00:20:34
sounds a little bit scary but it's just
00:20:37
not true it's just a simply a bad bad
00:20:40
metaphor why okay let's discuss why if
00:20:42
you or I rack up too much debt we
00:20:44
eventually have to pay it back or we go
00:20:46
bankrupt now the US government is not
00:20:48
the same as we explained a few minutes
00:20:50
ago it can just keep on rolling over its
00:20:53
debt issuing new bonds to replace the
00:20:55
old ones as long as investors trust the
00:20:57
government and as long as inflation is
00:20:58
under control this cycle can go on
00:21:01
indefinitely in fact the US has never
00:21:04
paid off its debt completely even after
00:21:06
World War II when the debt to GDP ratio
00:21:09
was well over 100% And we had an annual
00:21:12
Surplus in our budget we still didn't
00:21:14
use that Surplus to pay off our debt
00:21:17
instead the US policy makers chose to
00:21:20
grow the economy so that the debt became
00:21:22
a smaller percentage of the overall pie
00:21:25
isn't that an interesting fact right the
00:21:26
US has never paid off its de
00:21:29
and so again if we're worried about the
00:21:30
current state of the debt I I do get it
00:21:32
I totally understand where that fear
00:21:34
comes from but I think it's worth
00:21:36
understanding that at any time in the
00:21:38
past 250 years we could have sat here
00:21:40
saying I don't like the fact that we're
00:21:42
in national debt this were a household
00:21:44
we wouldn't be in good shape we have too
00:21:45
much debt and we need to pay it off well
00:21:48
we've never paid it off and I think
00:21:49
we're doing okay it's worth keeping that
00:21:51
in mind now yes a household running a
00:21:53
deficit month after month is in trouble
00:21:55
but a government running a deficit is
00:21:57
not necessarily in the same trouble
00:21:59
deficits mean that the government is
00:22:01
spending more than it collects in taxes
00:22:02
we know this but that money is still
00:22:05
circulating around the economy often
00:22:07
fueling growth if spending boosts
00:22:10
productivity if it boosts infrastructure
00:22:12
spending or social stability then it can
00:22:15
actually make the economy stronger I
00:22:16
suppose the analogy here would be if a
00:22:18
bunch of local families personal
00:22:20
families were all quote unquote in debt
00:22:22
but they were all using that personal
00:22:24
debt to spend money at one another's
00:22:25
businesses the businesses that they
00:22:27
owned themselves well those businesses
00:22:30
would be flourishing and sooner or later
00:22:32
they could use their business proceeds
00:22:33
to pay off their personal debts that's
00:22:36
kind of the same way in which as long as
00:22:38
government spending is stimulating the
00:22:39
American economy all that money is kind
00:22:42
of still flowing around the same exact
00:22:44
economy and it's all flowing in a
00:22:47
positive direction now it's interesting
00:22:49
though most of the arguments or points
00:22:50
that I'm making today they all fit under
00:22:52
this category of well the debt is not
00:22:55
necessarily a bad thing but that does
00:22:57
beg a question at least to me if it's
00:22:59
not a bad thing then it's a good thing
00:23:01
well I'm not sure like genuinely I don't
00:23:03
have a PhD in economics and when you
00:23:05
pull the people who do you get a wide
00:23:07
spectrum of answers but if we had to
00:23:09
make an argument in favor of giant US
00:23:12
debt it would go as follows first
00:23:14
government debt creates private wealth
00:23:16
for every dollar that the government
00:23:18
borrows someone else holds that debt as
00:23:20
an asset treasury bonds as we know are
00:23:22
one of the foundations of the Global
00:23:24
Financial system Banks Pension funds
00:23:26
insurance companies individuals all rely
00:23:28
on them as a safe interest bearing
00:23:30
investment in other words the
00:23:33
government's debt is the private sector
00:23:35
savings if the US eliminated its debt
00:23:37
tomorrow that would mean wiping out
00:23:39
trillions of dollars in assets that
00:23:41
people and institutions rely on for
00:23:43
Financial Security for a foundation for
00:23:45
a safety net the second reason deficits
00:23:47
fuel economic growth we just kind of
00:23:49
dipped our toe into this the government
00:23:51
spends more than it takes in well that
00:23:53
might be good it means that more money
00:23:54
is flowing into the economy creating
00:23:56
jobs funding infrastructure supporting
00:23:58
Innovation when the private sector slows
00:24:00
down like during a recession
00:24:02
governmental borrowing can step in to
00:24:04
keep up demand historically deficit
00:24:07
spending has been crucial in times of
00:24:08
Crisis like the New Deal during the
00:24:10
Great Depression or stimulus packages
00:24:13
after 2008 and co9 without those we
00:24:16
might be looking at a a bigger or a more
00:24:18
real economic collapse the third reason
00:24:21
is borrowing at near zero cost so would
00:24:24
you in your own life take out a mortgage
00:24:26
at 0% interest prob it it usually makes
00:24:29
a lot of sense to do so you'd get access
00:24:31
to money with no downside well for much
00:24:34
of recent history granted Maybe not
00:24:35
today but much of recent history the US
00:24:37
has borrowed at incredibly low rates
00:24:39
investors are so eager to hold us debt
00:24:42
because it is so secure that they accept
00:24:44
returns barely above inflation if you
00:24:47
can borrow money cheaply to invest in
00:24:49
things like infrastructure education and
00:24:51
Technology things that boost long-term
00:24:53
societal productivity I'm not sure
00:24:55
that's a problem it sounds like smart
00:24:57
economics instead the fourth reason we
00:24:59
don't really need to pay it off ever
00:25:02
people act like the US national debt is
00:25:04
a credit card bill but it's not the US
00:25:06
just rolls over the debt indefinitely as
00:25:08
we already explained earlier as long as
00:25:10
the economy grows faster than the debt
00:25:13
which it historically has done then the
00:25:16
burden of that debt shrinks over time it
00:25:18
goes back to our mortgage analogy right
00:25:20
we took out a mortgage in 2015 it was
00:25:21
$2,000 a month here in 2025 paying
00:25:24
$2,000 a month is much more manageable
00:25:27
that analog ology applies to the US
00:25:30
national debt after World War II we
00:25:32
already mentioned debt to GDP was over
00:25:34
100% but instead of paying off the debt
00:25:37
the economy grew that's how we Ed the
00:25:38
proceeds wages Rose the debt became a
00:25:41
smaller burden in the overall pie of
00:25:43
governmental spending problem solved and
00:25:47
then the last reason the alternative to
00:25:50
having a large national debt might be a
00:25:52
worse alternative what if the government
00:25:54
ran a balanced budget every year it
00:25:56
would either have to tax people more
00:25:58
taking more money out of the economy or
00:26:00
cut spending which hurts growth hurts
00:26:02
education hurts healthare hurts defense
00:26:04
either way you get a weaker economy if
00:26:07
people want a strong economy stable
00:26:08
financial markets continued Global
00:26:10
Leadership government debt isn't just
00:26:12
necessary it might even be desirable so
00:26:16
well I don't think we've solved national
00:26:18
debt through all these ideas today I
00:26:21
think and I hope I've done a good job
00:26:22
explaining to you all what's going on
00:26:24
and why it's going on and some of the
00:26:25
arguments whether it's good or bad and I
00:26:28
hope I've late to rest the idea that the
00:26:29
national debt should be compared to a
00:26:31
household debt if your household could
00:26:33
print your own money to pay off your
00:26:34
debt then you can compare it but since
00:26:36
none of us have that printing machine in
00:26:38
our basements the comparison simply does
00:26:40
not make sense so let's transition then
00:26:43
to what the national debt means for you
00:26:45
a smart long-term investor who's
00:26:47
thinking about your own financial plan
00:26:49
interest rates as we talked about before
00:26:51
are the most fundamental force in the
00:26:54
economy kind of like gravity for for
00:26:56
money as Warren Buffett would say just
00:26:58
as gravity pulls objects towards the
00:27:00
Earth interest rates pull money toward
00:27:02
different uses shaping everything from
00:27:04
personal finance to Global markets when
00:27:06
interest rates are low you can think of
00:27:08
money being lighter right less heavy
00:27:10
borrowing is cheap businesses expand
00:27:12
home buyers take on bigger mortgages
00:27:14
investors move money into stocks and
00:27:16
riskier assets in search of better
00:27:17
returns economic activity accelerates
00:27:20
just like an object floating in Low
00:27:21
Gravity but when interest rates rise
00:27:23
money gets heavier loans become more
00:27:25
expensive businesses slow down
00:27:27
investment home buyers pause investors
00:27:29
Retreat to safer assets like bonds the
00:27:32
economy cools down just as gravity keeps
00:27:34
thing from drifting endlessly into space
00:27:37
now the Federal Reserve acts like the
00:27:39
the master of gravity if you will
00:27:41
adjusting rates to keep the economy
00:27:42
balanced if growth is too slow they
00:27:44
lower rates to encourage spending if
00:27:46
inflation runs too hot they raise rates
00:27:48
to slow things down interest rates also
00:27:50
determine the value of money over time a
00:27:52
dollar today is not the same as a dollar
00:27:54
in 10 years and the rate at which we
00:27:56
discount that dollar in 10 years well we
00:27:59
should probably just use the standard
00:28:01
interest rate the governmental interest
00:28:02
rate to do that discounting so whether
00:28:04
you're borrowing for a home saving for
00:28:06
retirement watching the stock market
00:28:08
interest rates are the invisible force
00:28:10
shaping everything around us you might
00:28:12
not always feel it but just like gravity
00:28:14
it's always there pushing pulling
00:28:16
keeping the economy in motion now
00:28:18
interest rates obviously have a major
00:28:19
pull on our personal finances and now
00:28:22
the next topic related to the national
00:28:24
debt and our personal finances are taxes
00:28:27
whether you or me or policy makers
00:28:29
believe in modern monetary Theory or not
00:28:31
I think we all have to admit that we
00:28:33
could see a future reality where the
00:28:34
public conversation become something
00:28:36
like you know this national debt is
00:28:38
simply too crazy and now everyone is
00:28:40
going to have to pay more taxes because
00:28:42
of it if that conversation comes to pass
00:28:44
you better believe that life is going to
00:28:45
get more expensive what can we do to
00:28:47
protect ourselves from those potential
00:28:50
higher taxes my personal answer and the
00:28:52
answer that I give to my clients and the
00:28:54
answer i' give to you involves tax
00:28:56
diversification in your long-term
00:28:58
investing accounts okay what do I mean
00:28:59
by that well many of us listening have
00:29:01
options on where to save our money
00:29:03
perhaps it's in a traditional 401k or an
00:29:05
irra or in the Roth version of those
00:29:08
accounts or in a health savings account
00:29:10
or in a simple taxable brokerage as
00:29:13
we've discussed here on the podcast on
00:29:15
the best interest blog at length these
00:29:17
accounts all have different pros and
00:29:19
cons and different tax treatments some
00:29:22
have no future taxes some are taxed as
00:29:25
ordinary income some get taxed minimally
00:29:27
if you're old overall income is low but
00:29:29
then get taxed more if your overall
00:29:31
income becomes High the summary though
00:29:33
is that the money that you have in these
00:29:35
different tax buckets gives you an
00:29:37
option for how you want to withdraw that
00:29:39
money in the future in your retirement
00:29:41
when we don't know what the taxes will
00:29:43
be like but we're talking this about
00:29:45
this idea right now that maybe the taxes
00:29:47
will be much higher it's nice in that
00:29:49
situation if you have some dials to turn
00:29:51
depending on what the national and state
00:29:53
tax policy looks like I mean the analogy
00:29:55
I always give is if we look at the
00:29:57
current political IAL climate in general
00:30:00
right-wing conservative Republicans
00:30:02
generally want to lower taxes leftwing
00:30:05
liberal Democrats generally want to
00:30:07
raise taxes so let's just take that as a
00:30:10
rule of thumb not that it's always the
00:30:12
case but let's just take it as a rule of
00:30:13
thumb and let's imagine for the rest of
00:30:16
our lives every four years the political
00:30:19
parties flip-flop Democrat Republican
00:30:21
Democrat Republican and as they
00:30:23
flip-flop it's taxes go up taxes go down
00:30:26
taxes go up taxes go down
00:30:28
well if you have a a portfolio put
00:30:31
together involving some of these
00:30:32
different accounts that I just talked
00:30:33
about when taxes go up I'm going to pull
00:30:37
money more out of my Roth account
00:30:39
because there's no taxes due and I'm
00:30:41
probably going to pull money out of my
00:30:42
taxable account at least some of money
00:30:45
out of my taxable account because as
00:30:46
long as I keep my overall income low I'm
00:30:48
going to pay 0% capital gains taxes
00:30:50
there but then during the Republican
00:30:53
years when they come in and they want to
00:30:55
lower taxes well at lower tax rates I
00:30:58
can stomach the idea of paying income
00:31:00
taxes so those might be the years when I
00:31:02
pull money out of my traditional
00:31:03
investment accounts you know what I'd
00:31:05
rather pay income taxes during those
00:31:07
years I'm going to have to pay the taxes
00:31:08
eventually anyway so that's the idea
00:31:10
behind that tax diversification here's a
00:31:13
quick ad and then we'll get back to the
00:31:15
show every week I send a quick free
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email to thousands of readers that
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chart that explains some important
00:31:31
Concept in the news that week it's a
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great primer to boost your financial
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knowhow but Jesse I don't want another
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email well this might not be for you but
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I do hear you which is why I make it
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again that's a free no strings attached
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subscription at bestter interest. blog
00:32:03
now another big topic that affects us
00:32:05
all and has to do with the national debt
00:32:07
is inflation perhaps we're already
00:32:08
living through a period where major
00:32:10
decisions at the federal level
00:32:11
surrounding debt and printing money have
00:32:13
affected inflation we've all been to the
00:32:15
grocery store we all know how our eggs
00:32:17
and and blueberries have gone up in
00:32:18
price and ideally if we want to insulate
00:32:21
ourselves from national debt problems
00:32:23
part of the solution is shielding
00:32:24
yourself from inflation as best you can
00:32:26
to me the tool want to wield here is my
00:32:29
Investment Portfolio I'm going to link
00:32:31
an article in the show notes about what
00:32:32
kind of Investments at least
00:32:33
historically have fared well against
00:32:36
inflation granted it was to answer a
00:32:38
specific question about the postco era
00:32:41
so we only looked at data from like 2020
00:32:43
to 2022 but long story short if we're
00:32:46
talking about how to position our
00:32:48
portfolio to combat inflation the answer
00:32:51
is definitely not Bonds and cash even
00:32:54
high yield cash accounts right if the
00:32:57
value of a dollar
00:32:58
is decreasing around us which is what
00:33:00
inflation does then the last thing we
00:33:02
want is an investment instrument that is
00:33:04
paying us a fixed income of dollars and
00:33:07
and there's a reason why even though you
00:33:09
can get a a 4% from a high yield savings
00:33:11
account right now in early 2025 is
00:33:13
genuinely a bad idea to keep too much of
00:33:16
your money in cash it pains me every
00:33:18
time someone says yeah I know there's
00:33:19
inflation and sometimes stocks do well
00:33:22
but I've got half my money earning 4% in
00:33:24
a money market right now that's pretty
00:33:25
darn good yeah I mean 4% is better than
00:33:29
1% I agree with you there but it's also
00:33:31
not going to stay at 4% forever it's
00:33:33
definitely going to lose ground to
00:33:35
inflation over the long run and
00:33:37
meanwhile the probabilities are that a
00:33:38
diversified stock allocation is going to
00:33:40
crush whatever returns you're getting
00:33:42
there so again to summarize that cash
00:33:45
and bonds are not a good investment to
00:33:48
combat inflation there are other reasons
00:33:50
to hold cash and bonds right we we talk
00:33:52
about this all the time and I don't want
00:33:53
to beat a dead horse here but the reason
00:33:55
to have cash and bonds is because
00:33:57
they're stable for money that you know
00:33:59
you're going to need in the short run
00:34:00
and essentially the logic there is we
00:34:02
say yeah I I know over the next couple
00:34:04
years I understand that my bond
00:34:06
allocation is probably going to lose
00:34:09
some ground to inflation I'm willing to
00:34:11
stomach that cost because the benefit I
00:34:14
get is the stability from the cash or
00:34:16
the bonds to spend on these things that
00:34:19
I know I'm going to spend in the next
00:34:20
couple years I'm willing to trade that
00:34:23
stability against the cost of losing a
00:34:25
little bit of ground to inflation but
00:34:27
over five or 10 or 20 years personally
00:34:30
at least that is not a trade I'm willing
00:34:32
to make okay so what is a trade I'm
00:34:34
willing to make or what is an investment
00:34:35
that I want to pursue to combat
00:34:37
inflation well some people would say
00:34:39
that the anti-inflation investment is
00:34:41
real estate maybe I will say though in
00:34:43
our recent bout of inflation real estate
00:34:45
ended up being a terrible hedge the
00:34:47
reason there likely has much more to do
00:34:49
with covid which crushed the commercial
00:34:51
real estate market than it has to do
00:34:53
with inflation on the surface at least I
00:34:56
can definitely buy the argument that
00:34:57
over time real estate prices will rise
00:35:00
with overall inflation making real
00:35:02
estate a good a decent hedge against
00:35:04
inflation but really at the end of the
00:35:06
day I look at stocks another good idea
00:35:09
because as businesses and again stocks
00:35:12
are nothing more than businesses as
00:35:14
businesses face Rising costs as their
00:35:16
costs increase due to inflation they can
00:35:19
pass those costs onto their customers in
00:35:21
the form of rising prices their earnings
00:35:23
will increase their margin stay stable
00:35:26
and in a nutshell you get Rising stock
00:35:28
prices to coincide with increasing
00:35:31
inflation if inflation Chomps away at us
00:35:34
it's also likely going to negatively
00:35:36
affect social security and yes there are
00:35:38
Cola cost of living increases to Social
00:35:40
Security and they are there to help keep
00:35:42
up with inflation and they typically do
00:35:44
a decent job at that but one thing I
00:35:46
suspect we'll never see is a cola
00:35:48
increase that outpaces inflation so
00:35:51
again if we want to position our stock
00:35:53
portfolio to combat the potential
00:35:56
inflation that's going to be a ram
00:35:57
ification of this national debt
00:35:59
essentially I go back to just
00:36:00
goals-based investing and I say over the
00:36:03
short run I want to hold Bonds in cash I
00:36:05
know it'll lose ground to inflation but
00:36:07
at least it's going to be there stable
00:36:09
for me for my short-term spending needs
00:36:11
and then over the long run over these
00:36:13
long periods of time where yeah I'm
00:36:15
really worried about how inflation might
00:36:17
eat away at my portfolio over 10 or 20
00:36:19
or 30 years well that's where a stock
00:36:22
allocation again historically we can
00:36:24
look at the historical data and we can
00:36:25
see that stocks have provided a real
00:36:28
inflation adjusted positive return over
00:36:31
long timelines like that they outpace
00:36:33
inflation but then even if we take a
00:36:35
step back and just look at it
00:36:36
theoretically and say well why do we
00:36:38
expect that to be the case in the future
00:36:39
how do stocks outperform inflation why
00:36:42
might that continue again in subsequent
00:36:44
years the answer is because the
00:36:46
businesses that underly stocks have ways
00:36:49
of passing inflation costs onto the
00:36:52
consumer keeping their margins and their
00:36:54
earnings positive and that ultimately is
00:36:56
what provides us with our positive stock
00:36:59
return now something that we can do in
00:37:01
our personal finances that uses debt to
00:37:02
our advantage is that we can potentially
00:37:04
lock in debt inside our lives when rates
00:37:07
are low it's much easier said than done
00:37:09
and and some of it just has to do with
00:37:10
the timing of our own lives I know that
00:37:12
taking on debt can be a sharp
00:37:14
double-edged sword against us but when I
00:37:17
work with someone who has their forever
00:37:19
home locked in at a 2.5% mortgage that
00:37:21
they got in 2018 wow that's pretty
00:37:23
awesome now other than the incredibly
00:37:26
low rate the key here again is that the
00:37:27
rate is fixed it's the same Principle as
00:37:30
to why we don't want to invest in bonds
00:37:32
over long periods of inflation we don't
00:37:34
want to buy someone else's debt the same
00:37:36
principle is why we don't mind taking on
00:37:38
debt during those periods we already
00:37:40
covered that idea today right your fixed
00:37:42
monthly or yearly debt payment becomes
00:37:45
easier and easier to pay over time now
00:37:47
lastly but certainly importantly we need
00:37:50
to think about our own household income
00:37:52
our careers and our earnings potentials
00:37:54
and how they are kind of related to this
00:37:57
what if the national debt affects us
00:37:58
personally conversation so much of what
00:38:01
we're talking about here today is is
00:38:02
simply out of our control but perhaps
00:38:04
the financial dial that we have the most
00:38:06
control over is our own earnings
00:38:08
potential now that dial is definitely
00:38:10
challenging to turn in the short run
00:38:12
it's a little bit of a pet peeve of mine
00:38:14
when I'll I'll see someone in the
00:38:15
financial content creation space
00:38:18
especially I mean this is like an
00:38:19
Instagram or a Tik Tok or like a Twitter
00:38:21
thing that I'll see and someone will
00:38:23
just say it's easy just to increase your
00:38:25
income well okay that's really hard dial
00:38:28
to turn over the short run obviously if
00:38:31
it was easy to go out and double your
00:38:32
income tomorrow why wouldn't you be
00:38:34
doing it right I mean that enough is
00:38:36
proof to say that it's not easy to do
00:38:38
but it is within our locus of control
00:38:41
and whether that means having some hard
00:38:43
conversations with your boss going out
00:38:45
and pursuing a degree or a certification
00:38:47
starting a little side Hobby and seeing
00:38:49
where it goes now none of these paths
00:38:51
are necessarily easy they can't
00:38:53
necessarily be done overnight but they
00:38:55
are worth exploring again you're not not
00:38:57
going to be able to dictate federal tax
00:38:59
policy or the prices at the grocery
00:39:01
store or the returns from your stock
00:39:02
portfolio you're just going to have to
00:39:04
deal with the cards that you're dealt
00:39:05
there but you can have a more direct
00:39:08
control over your long-term earnings
00:39:10
More Money More income doesn't
00:39:12
necessarily lead to more happiness but
00:39:14
it certainly buys you flexibility in
00:39:16
this world and that's worth pursuing at
00:39:18
the end of the day the US national debt
00:39:20
is complex but it's not the same as
00:39:22
household debt the government is not a
00:39:24
family sitting around the kitchen table
00:39:26
balancing a checkbook it operates under
00:39:28
entirely different rules some experts
00:39:30
argue that the debt actually fuels
00:39:32
growth others warn of future
00:39:34
consequences and most recognize that
00:39:35
it's not as simple as good or bad to
00:39:38
have national debt or to be operating at
00:39:40
a at an annual deficit now what does it
00:39:43
all mean for you in your personal lives
00:39:45
well we should keep an eye on interest
00:39:46
rates as they impact everything around
00:39:48
us from mortgage payments to stock
00:39:49
valuations we should understand that the
00:39:51
government debt and economic growth are
00:39:53
deeply connected meaning policy
00:39:55
decisions can affect your Investments
00:39:57
and your financial future but in my
00:39:59
opinion we shouldn't get caught up in
00:40:00
fear-driven headlines or kind of these
00:40:03
overblown political arguments that go on
00:40:05
at the end of the day we should control
00:40:07
what we can control and a well-
00:40:09
diversified long-term investment plan
00:40:11
remains in my opinion the best way to
00:40:14
navigate economic uncertainty along with
00:40:17
uh our own ability to control our
00:40:19
earnings and build our own careers as
00:40:21
best we can the us our government we
00:40:23
have carried debt since our Inception
00:40:25
it's part of our DNA and unless
00:40:27
something drastic changes it will
00:40:28
continue to be that way so the real
00:40:30
question is not will we pay off our debt
00:40:33
but rather how will we manage it and
00:40:35
more importantly for you listening how
00:40:37
can you position yourself to thrive no
00:40:39
matter what thanks for tuning in to this
00:40:41
episode of personal finance for
00:40:43
long-term investors if you have a
00:40:45
question for Jesse to answer on a future
00:40:47
episode send him an email over at his
00:40:49
Blog the best interest his email address
00:40:52
is Jesse besin interest. blog again
00:40:55
that's Jesse best interest. blog did you
00:40:59
enjoy the show subscribe rate and review
00:41:01
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00:41:03
helps others find the show and invest in
00:41:06
knowledge themselves and we really
00:41:08
appreciate it we'll catch you on the
00:41:10
next episode of personal finance for
00:41:12
long-term investors personal finance for
00:41:14
long-term investors is a personal
00:41:16
podcast meant for education and
00:41:18
entertainment it should not be taken as
00:41:20
Financial advice and it's not
00:41:22
prescriptive of your financial situation