In recent weeks, the U.S. government has added roughly $1 trillion of debt, bringing its total debt load to more than $32.5 trillion. It's a dizzying number to fathom, and many people, like billionaire investor Ray Dalio, have suggested the U.S. is entering the beginning of a "late, big cycle debt crisis."
While the debt has grown to what appears to be a startling amount, billionaire investor Ken Fisher believes the concerns are overblown and that investors are actually looking at the debt in the wrong way. Here's why.
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Framing the context
Fisher believes that a lot of people are focusing too much on the large debt number and not framing it in the right context. The important thing to look at, according to Fisher, is the "carrying cost" of the debt, which is how much the U.S. must spend in interest payments each year on the debt, specifically in relation to the country's gross domestic product (GDP) and the government's ability to afford the debt.
The 72-year-old Fisher said this in a recent YouTube video series he does on debunking myths:
Today, despite all of the hoopla, the interest payments on U.S. government debt -- all of it -- total a little less than 2% of U.S. GDP, which is about where it was in 1980, about where it was when I was born in 1950. The debt is bigger, and there are some complicating features to it all. In fact, I think one of the reasons we have such debt phobia, in my opinion, is the government does a really lousy job of explaining anything about the debt very correctly.
Fisher also thinks that people are missing a critical part of the story of who actually owns U.S. debt. He points out that despite various stories and myths out there, the biggest owner of U.S. debt, which has been the case for a very long time, is the U.S. government. Fisher says this debt is much less concerning because it's "money in and out of one pocket to another, it's insignificant."
The actual debt people should worry about, says Fisher, is the net debt, which is debt the U.S. government doesn't own. This is actually $24 trillion and is right around what U.S. GDP is. But Fisher emphasized that he still doesn't view this to be more important than the carrying cost of the debt.
Should investors be worried?
Fisher is certainly no dummy when it comes to finance, and I think it's interesting that he points out that the current carrying costs as a percentage of GDP are similar, if not lower now, than it's always been.
Still, the cost of servicing the debt is expected to reach close to $400 billion this year, which equals roughly 6.8% of all federal spending and is one of the government's largest expenses. It is hard not to wonder what that money could be spent on instead, although it's not like the money being borrowed isn't also being spent on federal programs.
The way I look at this is that Fisher certainly makes some valid points and that it is important for people to realize that the U.S. government, for better or worse, has always sort of operated like this. But I wouldn't necessarily ignore the issue altogether, because debt interest payments are likely going to increase, and the U.S. government is currently borrowing at a much higher rate than it was even one year ago.
