Latest / Best of Business / Sam Dickie: Fisher Funds expert explains why the US debt burden is getting more attention

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Sam Dickie: Fisher Funds expert explains why the US debt burden is getting more attention · Best of Business

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  Speaker 1: You're listening to a podcast from News talks'd b follow
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  Speaker 2: Sam Dickey for your funds with me. Now, hey Sam,
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  Speaker 2: hither we're going, Oh mate, very well, We've got to
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  Speaker 2: talk about this US debt burden because this has been
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  Speaker 2: getting a lot of attention at the moment.
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  Speaker 3: What is going on? Where are we at with the
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  Speaker 3: US debt burden?
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  Speaker 4: So they owe thirty six trillion dollars, it's about one
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  Speaker 4: hundred thousand dollars per person, which is one hundred and
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  Speaker 4: twenty five percent of GDP, and that compares to US
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  Speaker 4: in Australia about fifty percent of GDP. But it's similar
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  Speaker 4: to heavily indebted countries like It's Lee, Greece, France and
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  Speaker 4: even China. And it's in the spotlight right now because
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  Speaker 4: one hundred and twenty five percent is around the peak
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  Speaker 4: we saw post will immediately post World War II when
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  Speaker 4: the US had to borrow a lot to finance it's
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  Speaker 4: war effort. And critically, US interest rates, especially those medium
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  Speaker 4: term interest rates, are near their highs. So the thirty
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  Speaker 4: year interest rates that at eighty year high and that
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  Speaker 4: means annual interest payments on that debt pile are now
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  Speaker 4: over one trillion dollars. Then, of course we have Trump's big,
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  Speaker 4: beautiful bill, and those against that say, well, left government
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  Speaker 4: debt by three to five trillion over the next decade.
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  Speaker 2: Somebody sent me a couple of charts on this today, Sam,
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  Speaker 2: and it was remarkable to see how the debt had
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  Speaker 2: kind of run along the ground for such a long time,
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  Speaker 2: and then all of a sudden you get this enormous spike.
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  Speaker 2: Have they got just a problem with their attitude towards
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  Speaker 2: debt there at the moment in the last fifty.
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  Speaker 4: Sixty years, Well, yes, they've I think. I guess it
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  Speaker 4: was basically in the eighties or post the eighties, and
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  Speaker 4: certainly into the nineties when they became addicted to debt
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  Speaker 4: and the green span put got put in place where
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  Speaker 4: we were every time there was a slight problem, he'd
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  Speaker 4: cut interest rights, stoke stoke propensity to borrow, and stoke growth.
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  Speaker 4: So I do think, not just then, but I think
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  Speaker 4: everyone around the world has got a little bit of
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  Speaker 4: a problem and is slightly addicted to debt.
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  Speaker 3: So what are the risks? Some of the disks are
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  Speaker 3: quite a hot for of something.
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  Speaker 4: Well, yeah, I mean the worst case scenario, and I've
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  Speaker 4: got to say I think this is a very low probability,
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  Speaker 4: is we're knocking on the door of what some people
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  Speaker 4: call the debt doom loop. So that's that self reinforcing
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  Speaker 4: cycle whereby that the debt burden reaches a tipping point
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  Speaker 4: and that drives up the borrowing costs that lenders would want.
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  Speaker 4: They'd want a higher risk premium, which in turn drives
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  Speaker 4: up debt and as the cost of borrowing rises for
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  Speaker 4: the government, it would also rise for individuals and businesses.
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  Speaker 4: That would drive down GDP growth and therefore further inflate
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  Speaker 4: DEAT as a percentage of GDP. Now, that is quite
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  Speaker 4: a doomsday scenario. Before we get too excited, a couple
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  Speaker 4: of things. Firstly, the US dollars of the world's reserve currency.
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  Speaker 4: They can print more dollars to ensure they don't default.
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  Speaker 4: It's not that attractive either. But also at the stage
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  Speaker 4: GDP growth is higher than interest costs, so we're nowhere
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  Speaker 4: near a doom loop. We should all brace though hither
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  Speaker 4: I think for more of that political brinksmanship you and
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  Speaker 4: I have talked about before, back in twenty twenty three
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  Speaker 4: when the government debt ceiling is close to being breached,
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  Speaker 4: and that whole debate with Congress will come up in
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  Speaker 4: August of this year, so watch out for that extremely
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  Speaker 4: low probability but extremely high impact event if it ever happened.
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  Speaker 3: How do they solve.
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  Speaker 4: This, well, three ways faster growth, or fiscal discipline or
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  Speaker 4: financial repression. So that's keeping interest rates artificially low, so
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  Speaker 4: taking each one of those in turn on faster growth.
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  Speaker 4: Of course, the maths is simple. Accelerating GDP reduces debt
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  Speaker 4: divided by GDP, and of course everyone wants faster growth,
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  Speaker 4: but the problem is that usually comes with higher inflation
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  Speaker 4: and there for higher interest rates. Now there is some
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  Speaker 4: early early hope that AI can drive productivity and economic
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  Speaker 4: growth while driving down prices we shall see. On the
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  Speaker 4: austerity side or fiscal discipline, no one, No one wants
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  Speaker 4: that from a political point of view, and that's why
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  Speaker 4: it's often not used in the market. Had hope the
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  Speaker 4: doge and it's promised to cut wasted would be the
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  Speaker 4: first step in this austerity journey, but obviously musks out
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  Speaker 4: on his ear and it seems like those big savings
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  Speaker 4: are a pipe dream. Let's not forget though, that the
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  Speaker 4: US is driven down debt post World War Two, which
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  Speaker 4: were of debt from around current levels one hundred and
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  Speaker 4: twenty five percent of GDP to thirty percent. And they
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  Speaker 4: also did it again in the nineteen eighties and then Portugal,
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  Speaker 4: Italy Island, Greece and Spain. The pigs in Europe had
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  Speaker 4: austerity forced upon them during the European financial crisis. So
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  Speaker 4: this is absolutely doable.
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  Speaker 3: Okay, So what do investors need to think about when
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  Speaker 3: they're thinking about all this stuff.
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  Speaker 4: Well, that the good news is that the riskers front
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  Speaker 4: and center really is and it's been openly debated by
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  Speaker 4: investors and politicians. That's great news. It's also good news
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  Speaker 4: that we learn post Liberation Day that Trump doesn't care
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  Speaker 4: about stock prices, but he does react to the bond
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  Speaker 4: market because a rise and interest rates affects everyone. It's
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  Speaker 4: always true that politicians have said for many years, we
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  Speaker 4: all know what to do, but we don't know how
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  Speaker 4: to do it and get re elected. We probably need
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  Speaker 4: the market, or more specifically, the bond market and rising
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  Speaker 4: interest rates to force politicians hands. So we should be
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  Speaker 4: watching this one pretty closely as always.
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  Speaker 3: Thank you so much, sam I really appreciate it. That's
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  Speaker 3: Sam Dickey for your fun.
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