National Debt: Does it Matter?
|
|
Last week, the US economy hit a dubious new milestone: US Government Debt has surpassed $22 Trillion.
That’s
$67,000 for every man, woman and child living in the US
, and it’s up $2 trillion since President Donald Trump took office. For comparison, US debt is more than the total size of the United States’ $20 trillion economy and equivalent to the
GDP of China, Japan and Germany
combined
.
What is the impact?
As the nation’s accumulated debt rises, the interest expense is going to keep rising too. The Committee for a Responsible Federal Budget, a nonpartisan watchdog group, says annual interest payments will nearly triple to $928 billion by 2029, from $325 billion last year. The federal government will spend more on interest than on Medicaid or on children by next year. By 2024, interest payments will match military spending. As more money goes to interest payments, less is available for things like infrastructure, schools and social benefits.
Debt is rising, but who cares?
Political differences are typically on full display in Washington, but there is one issue where Republicans and Democrats seem to agree: spending money. In part, that's because we've heard dire warnings for decades about unsustainable debt, but the ever-widening federal budget deficit has yet to result in economic calamity. Everyone suddenly thinks huge deficits, surging well past $1 trillion annually, aren’t a big deal. More and more economists are unconcerned about red ink, thanks to insatiable demand for Treasury paper, which is keeping interest rates low.
Modern Monetary Theory (MMT)
One idea that has recently received media attention and has been promoted by some of the more progressive economists, is the concept of Modern Monetary Theory or MMT. Under this theory, deficits should not be cause for concern because any government that issues its own currency can always pay its bills simply by printing more money. The only limitation on debt therefore, should be the threat of inflation, which today, is still low. If the government did spend enough to stoke inflation, it would simply increase taxes to pull money out of the system. And some prominent
billionaires,
are already publicly arguing for raising taxes. (In next week's Digest, we will expand on this concept by sharing a story Howard Marks recently told called, "The American Tax System Explained in Beer").
In our view, the
rising debt represents a time bomb that will eventually explode and derail the economy.
Just like our family budgets, if you spend more than you can afford, there will be consequences. More immediately, the rising debt will reach a statutory limit known as the "debt ceiling" later this year. If history is an indication, Congress will likely battle over its decision to raise the debt ceiling or not and these battles - and accompanying threats to shut down the government - may erupt more frequently. Though MMT may represent a convenient way for politicians to justify deficit spending, when the debt begins to impact our economy, they will only have two unsavory choices: increase revenue (thru tax increases or economic growth) or cut spending.
|
|
For the 8th consecutive week, the major US Equity indexes posted positive results as participants reacted to
progress on US-China trade talks, Congress avoiding a second government shutdown, and the Fed maintaining its dovish stance.
S
tocks in the energy and industrials sectors within the S&P 500 Index generated the strongest returns, while utilities and financials were the laggards. Crude oil rose almost 5% last week with West Texas Intermediate climbing past $55/barrel on Friday.
|
|
Retail Sales
Due to the government shutdown, retail sales data from December was just released last week. The results were disappointing.
Retail sales fell 1.2% in December which was the sharpest monthly decline of the expansion (since September 2009). Interestingly, vehicle sales, which doesn't typically fall into the holiday shopping season category, made a strong positive contribution to the total. If vehicle sales are excluded however, retail sales fell 1.8%.
The year-over-year rate for total sales fell nearly 2 percentage points to 2.3% - its lowest reading since late 2016. These results may reflect consumer edginess going into the government shutdown but they contrast very starkly with strength in the labor market.
|
|
Active Fund Fees
Prior to 2002, cost was not a primary driver when investors chose an actively-managed fund. Over time, however, cost has become one of the main drivers behind investors’ decision-making process. More expensive active funds have experienced dismal outflows for the last five years, while their low-cost counterparts remained in positive flow territory.
The graph above illustrates the fee pressure asset managers are facing as investors’ demand for low-cost funds increases. Net inflows (dark orange) to low-cost actively managed mutual funds continue to be positive while high-cost actively managed funds (yellow) have seen outflows over the past five years.
|
|
Viral Painting
After she completed her second-ever art class, Cindi Decker from Jacksonville, Florida sent a picture of herself and her painting to her son. Decker's son liked the image, posted it to social media site, Reddit, and unknowingly kicked off a viral sensation.
Shortly after he published the picture, another user, Kristoffer Zetterstrand from Sweden, decided to paint his own picture depicting Decker holding the artwork. Zetterstrand painted Decker as practice doodle saying, “I usually do a small ‘warmup’ painting when I get to the studio – and the motif usually isn’t that important. I pick some photo off the internet or the paper. So this day I decided to do that photo just for fun [because] I thought it was cute.”
A few hours later, he
posted a picture of himself back on Reddit
and his post took off. 19-year-old Canadian artist Laila Amer was the first to paint Zetterstrand holding his painting of Decker and her egret. It snowballed from there.
With an estimated 50 paintings of paintings within paintings that all originated from Decker’s egret, some Reddit users have even created diagrams and a “family tree” of all the associated images and how they are related.
Zetterstrand has since said, “It’s a bit absurd to see a quick oil sketch that I did for fun completely blow all my serious work out of the water in terms of views – [but] I’m not complaining, it’s funny." He added that he has been in contact with Cindi and plans to send her his oil painting in Florida.
|
|
New Market Wealth Management offers the personalization of a boutique wealth manager coupled with the knowledge and resources of a large firm. Through our
strategic partnership
with Cliffwater LLC, a leading institutional research and advisory firm, and a minority partner, New Market Wealth Management specializes in an endowment style of alternative investment previously afforded to only large institutions.
|
|
|
|
|
|
|
