A Rising National Debt Bodes Well For Stocks and Bonds

Soaring government debt bodes well for your investment returns. This is true for both stocks and bonds.

Your investments rate extra thought given the nature of economic commentary now. “How the National Debt Affects Your Investments” was the headline to a recent piece about – yes – the national debt. Every time a round number is reached, in this case $40 trillion, commentary about the alleged implications of the round number picks up quite a bit. And it’s always the same.

There’s writing about spending cuts that will allegedly bring the debt down, tax increases or cuts that will raise revenue sufficient to bring the debt down, the various “crises” that await us if nothing is done about the debt, and of course talk of how the debt affects the economy and your investments.

The debt should have you investing more aggressively. Stocks and bonds both. And no, that’s not because government spending and borrowing boost the economy. Quite the opposite.

Government spending is easily the biggest tax on progress of all. Which is no insight. Or shouldn’t be. But since governments produce nothing, they only have money to spend insofar as they have taxable access to private sector production.

When governments spend they’re extracting precious fruits produced in the private sector, only to centrally plan their allocation. The unseen is hideous. Think of all the great and awful entrepreneurial ideas not hatched - thus the restraint of knowledge creation required to boost wealth creation – because the federal government has so much taxable access to precious wealth.

As for the debt, it’s horrid too. Governments can only borrow in sizable amounts insofar as their present and future revenue collections are expected to be sufficient to pay monies borrowed back. Which means the growing federal debt signals just how much the federal government’s coffers will be expanded as private producers expand wealth in the private sector. With this and $40 trillion that lenders don’t fear top of mind, think of the trillions that will be allocated in politicized fashion by politicians over private allocation to technological, lifestyle, and healthcare advances. Government consumption taxes us like nothing else.

Yet rising federal debt bodes well for stocks still. And that’s because it still signals soaring amounts of wealth creation despite the ball-and-chain of government. And as wealth creation grows, so grows the value of the equities that readers hold. Wealth creation in the private sector correlates with rising valuations placed on public equities. No doubt the wealth creation would be much greater without the government spending and debt, but the previous truth doesn’t alter the empirical one that as government debt soars, so does the valuation of equities.

This is true for bonds too. If the tax revenue intake for the federal government is growing on account of skyrocketing private sector wealth creation, so increases the ease with which Treasury will be able to pay monies borrowed back. This will, in isolation, reduce Treasury’s borrowing costs if history is any kind of indicator: since 1980, federal debt has soared from $800 billion to $40 trillion alongside falling borrowing costs for Treasury. Assuming what’s debatable, that Treasury’s borrowing costs benchmark the value of bonds more broadly, a rising national debt will be good for bonds too.

The crisis? It remains not the $40 trillion Treasury owes, but that Treasury can be so heavily in debt in the first place. That’s the crisis, and it’s rooted in what an enormous tax on progress government spending and borrowing are.

Originally published on Real Clear Markets.