Take Advantage Of The U.S. Debt Problem
🚀 The quick version: The U.S. Government now has close to $33 trillion in total debt outstanding which amounts to about $98 thousand for every person living here.
What brought these facts more into focus recently though were two pieces of news:
Fitch downgrades the U.S. Credit rating. This one was all over the headlines as the rating agency Fitch decided to downgrade the U.S. credit rating to AA+ from AAA. This is similar to saying on a credit score range of 300 to 850 the U.S. now has a credit score of about 840 and not 850; overall, not a big change, but not nothing either. The agency basically said the reason for the downgrade was because the U.S. was not serious about getting a hold of its debt (sounds kind of like us when we send the kids to their room). Worth noting this has happened before as Standard & Poor’s downgraded U.S. Debt in 2011 on similar reasoning.
Treasury Department increases borrowing estimate. A less talked about piece of news but equally as important was the Treasury Department coming out and announcing they underestimated the U.S. Government borrowing needs for the third quarter by about $270 billion (someone in accounting probably got fired). As an aside the U.S. Government “earns” money through our tax dollars, and when they spend more than they earn, the Treasury Department has to issue debt to fund more spending.
👪 How it affects your family: Our overall thoughts on the increasing amount of U.S. debt (and we reserve the right to be wrong) is that while the politicians in Washington can’t be reckless forever, the situation is not worth you worrying about for a couple reasons:
Our total debt is not that high. Yes, $33 Trillion is a lot, but when you compare it to the size of our economy it amounts to about 120% of our annual GDP. This is 16th highest in the world when looking at other countries (Japan is about 300% of their annual GDP).
Over half is owned by us. According to latest data, over half of the $33 Trillion is actually held by U.S. institutions, the Fed, or citizens. That is something the media leaves out when they try to scare you about foreign ownership of our debt.
Our currency status gives us protection. The analogy that the U.S. government needs to keep a balanced budget like a family household is not entirely accurate. With our status as the world reserve currency (which is not changing) by issuing debt we help other countries that need U.S. dollars to grow. For example if you are a company in Africa and want to build factories you likely need U.S. Dollars to pay for materials. What’s a great way to get U.S. Dollars? Buy U.S. bonds and collect interest (in dollars, of course). This is a luxury no other country has.
More important though than letting the media scare you about the U.S. debt issue, you can use it in a way to help your own family get ahead. Here’s how:
Capitalize on Treasury Bond interest rates. With the Treasury needing now to issue about $270 billion more bonds, that means we are going to have a lot more supply. As with anything anyone is trying to sell, when there is a lot more supply, the buyer has more power to get a better deal. In this case, that means the buyers of these bonds will likely demand higher interest rates which is your opportunity to capitalize when you see the rates go higher (you can watch these rates here under the “Yields” column). Short term Treasury Bonds (3 month, 6 month, 9 month) already offer you over a 5% return which is a safe place to park some cash especially if you are worried about the stock market (we explain a technique to do so here).
Start a family conversation about debt (and set the kids up early with a good credit score). If you want to start talking to your kids about debt or spending dangers, these are great headlines to get the discussion going (unlike the U.S. Government, we families have to balance a budget!). For parents with kids under 18 here are steps you can take to teach them about credit and actually boost their credit score before they turn 18.
