Uncle Sam's Maxed-Out Credit Card

We examine the debt ceiling crisis and its implications for investors, revealing how this political standoff reflects deeper problems in America's fiscal health that could impact global financial markets and your portfolio.

• Debt ceiling is a uniquely American concept (shared only with Denmark) limiting federal government borrowing
• Official national debt at $40 trillion excludes $25-30 trillion in unfunded Medicare, Medicaid, and Social Security liabilities
• Rising interest rates have increased annual debt servicing costs to nearly $1 trillion
• Foreign ownership of US debt includes Japan (12.7%), China (8.9%), UK, Luxembourg, and Cayman Islands
• Investors should consider maintaining cash reserves and diversifying beyond Treasuries
• Economic growth through improved immigration policies could help address the debt-to-GDP ratio
• Current political focus on tariffs is "puffery" distracting from real solutions to debt problems
• Per capita national debt now exceeds $106,000 for every American

Be careful out there as an investor - have a plan B and stay balanced, flexible and ready to adapt as economic conditions change.

Straight Talk for All - Nonsense for None


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Chapters

• 0:50 Introduction to Debt Ceiling Discussion
• 4:22 Defining the Debt Ceiling Problem
• 5:55 The True Scale of US Debt
• 11:21 Potential Default Scenarios
• 17:16 Foreign Ownership of US Debt
• 22:44 Solutions and Future Implications
• 28:50 Immigration and Economic Growth
• 30:31 Final Thoughts for Investors

Transcript

Speaker 1: 0:26

Hello everyone and welcome to Skeptic's Guide to Investment. This is Steve Davenport and I'm here with Clem Miller and we want to talk about the debt ceiling certainly in the front of the news and it's certainly something on a lot of people in Washington's plate, but how does it affect the average investor? What is the average person supposed to do with this, and should they be concerned, or should they just turn away and turn to another streaming channel and watch some more? Love is Blind. I think that, as Americans, we have a responsibility to be prudent and educated, and I think it's good to understand, and so we'd like to, in the next 20 minutes, kind of just go through some of the basics, and we think that by doing that, you'll be able to place the debt ceiling in the proper perspective to all the other things you have going on in your life. Clem, what do you think are the key points about the debt ceiling that the average investor needs to know?

Speaker 2: 1:26

Okay, so you know definitionally. First, we're talking about federal debt, right, that is, T-bonds and T-bills. We're not talking about state debt, we're not talking about private debt, it's only federal government debt. So that's one thing. Second thing is, we're talking about a ceiling, which is a ceiling on the overall stock of debt. We're not talking about a ceiling on debt service, right, we're talking about a ceiling on the stock of debt. That's second thing I would say.

Speaker 2: 2:02

Third thing I would say is that, given the fact that every year we typically have a deficit I think the last time we didn't have a deficit was back in the Clinton years Every year we have a deficit that adds on to the debt, so that the debt keeps growing year after year after year, and that necessitates increases in this debt ceiling.

Speaker 2: 2:34

So that's the third thing I would say. Fourth thing I would say is that the US is one of the very few countries I think maybe there's only one other country, Denmark, I think which has a debt ceiling country Denmark, I think which has a debt ceiling, because I think most countries realize that it's impractical to actually have a debt ceiling because you're going to actually have to raise it frequently in this current environment. So I think that's you know. And of course, the idea of a debt ceiling emerged in a period when there wasn't as much debt going on. It wasn't being taken on as fast as it is today, and so you have more frequent occasions when you reach the debt ceiling. And then that was the fourth thing. No-transcript.

Speaker 1: 3:58

Let me just add two or three items. One item that I think needs to be considered is Medicare, medicaid, social Security liabilities are not included in the debt ceiling. So when we look at the US economy I'm going to throw out numbers, clem, and you can correct them if they're off by a lot, but I believe that right now the US economy has production capability or GDP of about 30 trillion. I think we're at about 40 trillion in our current debt and treasuries and other instruments. I think that the Social Security, medicare, medicaid liabilities that are unmet would add another $25 to $30 trillion. So that would put us. If we were to include those which I think they're real liabilities, and I think if anybody tried to cut them, there would be some real distress in the United States. So that really puts us. If we take 40 plus, let's say, 20 for those things instead of 25 or 30, that puts us at 60, which was as a 200% ratio of the debt to GDP.

Speaker 1: 5:09

But the biggest part I think that we're missing from this debt discussion is interest rates are much higher. When interest rates were near zero, guess what? Servicing the debt was a $200 billion or $300 billion exercise. Now we're at $900, close to a trillion in interest. So that means every year we're going to have to service almost a trillion dollars more than any defense budget, more than any other element in our economy that the government is involved in will be debt service, be debt service. Debt service is a cost, and if the interest rates don't come down which I hate to say this, glenn, but tariffs lead to higher interest rates. Higher interest rates lead to the government debt service being even larger. So the amount of debt we have, it's one problem. It's not even truly the whole description of the problem. It's only a description of the stuff they keep track of, which is treasuries and other securities not including Medicare, medicaid and Social Security Irrational. Why don't we include them? They're real liabilities, they're really obligations that we intend to pay. Are they like a treasury? And so therefore, I say, if we really want to get serious, we need to get the whole problem out.

Speaker 1: 6:42

And then we start talking about the whole problem and we start talking about lower rates, which would then say tariffs in these activities with our trading partners aren't lowering interest rates. Therefore they can't be good for the overall economy, because we can't keep growing and paying for things with our credit card when we should just say let's cut the credit card up, let's go to some type of a limited. Just say let's cut the credit card up, let's go to some type of a limited. I like your idea making it European-like, with the idea that it's based on the overall economy and a percentage above the economy. Okay, let's say it's a ceiling of 150% of GDP and if we included Social Security, it's 200. I think you have to start somewhere, which is where I have the biggest frustration here, because of all the things I've heard of with closing borders, opening borders, foundries, moving semiconductors not moving semiconductors. Everything we talk about is irrespective of the biggest problem we face, which I believe is the deficits and the debt. Is that? Am I being?

Speaker 2: 7:51

too alarmist. No, I think you're absolutely right and let me, let me ask you a question, Steve. Oh is it going to be?

Speaker 1: 8:00

hard.

Speaker 2: 8:01

No, it's going to be very easy. No, it's actually semi-easy. Let's say we do have a default on this debt, that the debt ceiling isn't raised in time, that you have a default on part of the debt, or let's say that there's a higher prospect of default because the debt ceiling has been reached. What do you think the rating agencies would do the credit rating agencies and how would the market respond to a downgrade? I mean, there was a downgrade a few years ago during one of these episodes, but if there are more downgrades, how do you think interest rates would respond to that? On to that, as you and I know, the CFAs.

Speaker 1: 9:08

When the uncertainty rises, the interest rates rise. So therefore, I would say, if there's a debt downgrade, then that's saying there's less certainty in the US paying all of its debts, and I would say that would cause higher rates and it would make the problem worse. So therefore, I look at this as a problem that we need to face sooner, not later, and I also look at how we think about the debt and how we think about this. If we were having, you know, if we had Miller Corp and Davenport Corp, and we looked at our lives, what have we done in our life? We've gone to a point where we're trying to reduce debt so that we can more easily manage cash flow. And I look at us and say, hey, we want to invest in these starting industries, we want to help this industry in the US, to help onshore. All of these things are out there that we could be doing, but we can't because we are so hamstrung by debt. The one thing I've heard that has been the most frightening is that I've heard, since we've had this incident, where all of the Russian assets that were part of the SWIFT system were basically commandeered by whatever organizations that were part of the Ukraine alliance, and so those Russian assets that were in the system were basically taken over, and those assets are being used now to try to help the Ukraine rebuild.

Speaker 1: 10:40

That decision to take a system that had rules and regulations and guidance and never included the ability to isolate one member was really a pretty big decision by the US Treasury, and what I would say the next decision that could come down the line that will be equally outrageous would be. Well, if that country is doing things we don't like and we want to send a message, what if we said that the Chinese debt didn't deserve interest payments? Because their behavior is so anti-US that we feel they shouldn't be a part of the system, they need to be punished, and the way we punish them is to not pay interest. It would help our budget deficits, it would help our overall economy, but what would it mean to the world in terms of buyers of US treasuries? If you are on the wrong side of the US in terms of not getting along and not agreeing to tariffs and other things, we'll just stop paying the interest on your debt. The debt that you own of the US will suddenly become worthless. Not worthless meaning it has no value, but just if you have no interest payment and you simply have principal, what do you do? Do you sell that to another country? Are they going to pay you for that debt having an interest payment, or are they going to have to? You're going to have to take a discount to that so that the other person can get it, and when that other person gets it, they get an automatic increase because that country has a good relationship with the US and they can collect the interest.

Speaker 1: 12:19

So there are things that are being discussed and some of them seem outlandish, but we have a pretty outlandish situation with our debt and I don't think we're even talking about the right picture. We're talking about a picture that doesn't include almost half of the obligations that we have as a country, so we're not really thinking about the full obligations. We know that. You know Social Security increases and all of the things involved in Medicare. If we don't get a hold of our Medicare costs, that's going to be more. That's a bigger liability trillion I should have probably said 30 trillion, in which case you'd be more frightened and you'd be more likely to act. But I want to stay skeptical, and not soon. Is that fair, colin?

Speaker 2: 13:15

Yeah, I mean, I think you've outlined a, you know, a kind of a nightmare scenario where you have a selective default that's the term used where you know the US might pay. Well, certainly it would pay its own citizens.

Speaker 1: 13:35

I think we'd pay Japan and I think we'd pay England and I think we'd pay.

Speaker 2: 13:39

I think we'd pay Japan, and I think we'd pay England, and I think we'd pay I'm not sure if the systems are available. I guess Elon Musk would know, because he invaded them right.

Speaker 1: 13:52

When we went to SWIFT, we knew which assets were Russian, didn't we? When we went after?

Speaker 2: 13:58

well, because, because, uh well, the swift system is about banks right, about bank deposits, and it doesn't involve us. It's a different issue, but it has the same kind of analogy in the sense of um, you know, you're using a global financial system in order to, uh, in order to reinforce sanctions, right and and and. The scenario you outline it would be selective default on US treasuries as a form of sanction, and I think that it depends on the effectiveness of that. I mean, putting aside market impacts, but the effectiveness of that Putting aside market impacts, but the effectiveness of doing that requires having knowledge as to who actually is holding those treasuries, and I'm not sure that that information is readily available.

Speaker 1: 14:59

I mean, there has to be, there was a whole group of people that were very worried that our treasury system was being overrun by the Japanese and the Chinese. They were going to own so much treasury that we were not going to be able to say no, and they were going to take over the country.

Speaker 2: 15:15

Yeah, that's kind of nonsense now.

Speaker 1: 15:19

But in the 70s and 80s, I remember hearing it, I remember thinking oh wow, the Chinese are going to own everything.

Speaker 2: 15:25

I mean they do hold a lot, but the vast majority, vast majority of US treasuries are owned by US citizens.

Speaker 1: 15:35

Really, I thought it was close to 20 or 30 percent international no.

Speaker 2: 15:39

Let me check. I thought it was close to 20 or 30% international. No, let me check Vast majority. I mean 80% is is vast majority. Okay, unless you think 90%, 95% is vast majority. I mean we can look it up, but I think I think 20% sounds about right and I think I think Japan was the largest in that. I know UK had a lot. China, the Gulf states we can't forget about them. They had a number of treasuries. China, certainly, but we don't know among those Chinese holdings, we don't know that it's the government of China or Chinese banks or Chinese individuals. I mean there's a lot. This would be a very complicated, this selective default business would be very complicated to organize.

Speaker 1: 16:34

Top foreign owners of US national debt Japan 12.7. China 8.9. So almost exactly 21. So Cayman Islands and Luxembourg, which I think is kind of interesting.

Speaker 2: 16:52

How much is in Cayman Islands and Luxembourg?

Speaker 1: 16:56

397 billion in Cayman. Um 397 billion in cayman.

Speaker 2: 17:07

Uh, luxembourg was um yeah, is the fourth largest holder, um per capita 128 000 these are, these would be people who don't want the us government to know, uh, who they are right. They're nominees, so to speak, and so we don't know who those people are right.

Speaker 1: 17:32

Right, but that doesn't mean we can't save a few US dollars and not pay them their interest, does it yeah?

Speaker 2: 17:35

because I mean, you know, cayman Islands, it's a bunch of mailboxes, right, bunch of PO boxes. A bunch of mailboxes, right, a bunch of PO boxes.

Speaker 1: 17:43

I like mailboxes. I have a mailbox and I like when it chucks in there and it's my interest payment. I mean, what are you going to think against mailboxes? Luxembourg is 425, and the UK is 765. And they're in third place at 8.9. They're almost tied with China. Yeah, china is 768.

Speaker 2: 18:07

And how much is US?

Speaker 1: 18:11

Well, this is the top five foreign owners, so I don't know what the overall percentage is, but Japan had a trillion. I mean, I think they're good, right, we still like Japan. So I think the big question is China, and will China, will we, ever resort to that type of treatment of another country? If there's, I'm going to go out on a limb here and say if something happens with Taiwan and the US is looking for ways to punish China for invading Taiwan, that's it. That's a pretty strong reaction.

Speaker 1: 18:51

But I think that's, you know, in people's testing of different strategies and I don't think I have to agree with that.

Speaker 2: 18:57

Yeah, of different strategies, and I don't think I have to agree with that.

Speaker 1: 18:59

Yeah. So all I'm saying here, and I think all we're really trying to say, is that the debt ceiling is an indicator of a much bigger and broader issue, which is how do we exist among other countries with the use of our assets, the use of our currency? And, if we do think about it, are there extreme situations where we might make a decision. That is, I've heard, there will be no default. But I also think when you start talking about it, you're immediately bringing up the possibility. I mean, I think it's out there and I think it's being thought about and it's being talked about. I think we should think about it as investors, because it would sure make the corporate debt of J&J, which is still AAA, much more valuable, wouldn't it If you were in another country and you owned J&J debt instead of owning treasuries?

Speaker 2: 19:58

I think it suddenly makes gold a lot more valuable. It suddenly makes gold a lot more valuable, warren IRWIN.

Speaker 1: 20:02

It makes gold a lot more valuable. It makes a lot of things more valuable, and that's, I guess, what I'm trying to say. For investors, some of the thinking that you have to go through is what is a worst case scenario and how do I prepare and stabilize what is our need for income and our need for growth, and how do we balance both, such that our portfolios will change and will evolve, but they will still be trying to satisfy those two objectives? Right, I want to have reasonable growth and I want to have income that will allow me to live the kind of life I want to live, and I think, once you start disrupting the SWIFT system and start disrupting the treasury system, you're talking about two areas that, for decades, have been kind of stalwarts in our economy, and I think that the fact that we're even talking about it is not good. I don't think it's a zero probability, I don't think it's 100. I don't think it's 20. But the fact that we're thinking about these things means that we have a problem and we need to address it, and I think that, overall, thoughtful people would say this is the way I would run my business if I was the CEO or I was the president. Why would we want to have this type of management with all the assets in the United States, all of the things that we have at our disposal to run our government more effectively? To run our government more effectively?

Speaker 1: 21:43

It feels like we're grasping at straws and we're doing things that are out of sync with what reasonable people should expect, and I don't think that's a political statement. I think that's everyone's responsibility, republicans and Democrats, and I think the fact that we've gotten to this situation is everybody's fault. It isn't one, it isn't a Biden problem. There's plenty of blame to go around. What we have here is a problem with debt, and the solutions are to pay the debt and hope that we grow faster and if we grow faster than the debt grows, then we will pay some of it off or we need to do something with a reallocation of some of that income to paying off debt.

Speaker 1: 22:31

And my last comment will be I believe one of the things that will come up when we talk about this tax cut extension is should any of the income that comes from the extension not being extended? That money wasn't planned on coming in. Therefore, could that money be allocated towards the debt, and in that way, the whole country would not be happy that their tax rates went up, but I would certainly be more happy that some of my money that was going to the government was going to lower the national debt. I think that per capita it's a very large number, and I'll probably get that to you by the end of this podcast. What do you think, clem?

Speaker 2: 23:17

uh. Yeah, I think I agree with you that there has to be uh, some attempt to reduce, uh to start paying back or slowing some of the growth in the debt. I think slowing growth in debt is a more realistic objective slowing it so that the percentage of GDP, the debt as a percentage of GDP, starts to shrink. I think that's a logical objective. I think the way to get there is by a combination of less tax cut, less continuation of tax cut and or cuts in government spending. So I think that's got to be the way to handle that.

Speaker 1: 24:15

As of early 2025, the national debt per capita, that's, with $36.2 trillion in the national debt and $332 million US population, is $106,000 for every man, woman and child in this country. Of course, you don't pay debt with people, right? I don't know. But I'm saying if we had to lay everybody responsible for their own debt, um, then you know we could all make a contribution equal to our amount of the national debt and I'm sure the four or five hundred people who did that would help reduce some debt. But yeah, I I think the imagery is still real, meaning, yeah, $100,000 of debt per capita, and I look at my taxes and I say, ok, how much is going to run the government? And if they took 5% of my taxes and applied it to the debt, would I think that's a good move? I agree. First you have to control the growth, then you have to go after actually lessening the amount of debt, and the way you do that typically is to grow your way up.

Speaker 1: 25:27

I'm not sure if interest rates continue to rise, that growth out of it is going to. We're going to have to achieve an exit rate of 7% or 8% for GDP, which is not sustainable, of 7% or 8% for GDP, which is not sustainable. So when we have a growthy market, we're talking 4% to 5% GDP. Now we're talking 2% to 3%. So can we double the growth rate of the economy and come up with some solutions? I think it's going to be hard, but we got to look at it. I don't think that not looking at it has really worked for us. I don't think we've naturally had an affinity away from it. I think we've had an affinity for it.

Speaker 2: 26:11

So, steve, let me just make one last comment, and I know we have to run, but the one way that we can one tool we can use in order to help reduce the debt, that is, to reduce the debt as a percentage of GDP.

Speaker 1: 26:39

By increasing GDP is to encourage immigration into the United States Correct, I agree, there's lots of like, I think, our immigration policy. I mean we've talked about it. I mean we've got PhDs and master's students who are being sent back to their countries because we don't want to give them any path to citizenship or an ability to work here.

Speaker 2: 26:53

But even those who are less educated, you know, provided that they aren't actually violent criminals, right? Why not encourage them to come here and pay taxes and use their tax revenues to help pay down? You know, pay down the debt or slow down the growth of the debt. Why?

Speaker 1: 27:14

not. We could tie the two together. I mean, I don't know what's going to happen to the $5 million golden visas that Trump's giving out. I mean, is the $5 million going to go to pay off the debt or is it going to go to pay off the tariffs? I mean, there are a lot of solutions here, clint, but all I know is that we're talking about tariffs on steel and aluminum and we're talking about wine tariffs of 100%, and I think those are the wrong conversations. Yeah, do you?

Speaker 2: 27:49

Yeah, I think tariffs is an entirely different discussion, but I don't think the tariffs are going to be— it's a distraction. It's a distraction, it's a distraction and and you're not going to get the sizable persistent level of income that you need from tariffs, uh, to help resolve this debt problem.

Speaker 1: 28:14

Right. I don't think it's the. I don't think it's the answer. I don't think it's close to the answer. I think it's more answer. I don't think it's close to the answer. I think it's more puffery. Yeah, and I don't think that that has been, you know, trademarked yet, but I'm going to say it here. Puffery is my description of what's going on and it will be continued to be in my discussion until we really start talking about some of the more serious issues in my discussion, until we really start talking about some of the more serious issues.

Speaker 1: 28:42

So, as investors, be careful out there, because some of the main issues still aren't being dealt with and therefore, that's why you hold a position in some fixed income securities or cash to try to make it so that, if we have a worst case scenario and some of the debt weren't paid because of an invasion of Taiwan or whatever the situation, we have some cash and bonds that we can use to buy back some of those assets at a better price in the future. Not something I want to do. I don't want to see a 30% decline so I could buy more stocks. I would rather see us try to do things to create value right now and we move on from here. But I think that what you have to do as an investor is sometimes you have to have a plan B, a plan C, a plan D, and I think that all of us need to just be a little more careful and try to stay balanced and flexible and able to move in different directions as the tide or the government changes.

Speaker 1: 29:45

Anything else to add? Clem? Nope, that's it All right. Thank you everyone. I enjoy having you as listeners. We enjoy doing this to help you improve your investing IQ and we hope to have some great guests coming up Fraser Rice and Steve Petuso and we just want to continue to give you value in terms of ideas to help your investment portfolio and your investment IQ. Thank you,