Ty A. Bernicke CFP® | Posted: June 5, 2020
Presently our federal national government debt is somewhere in the neighborhood of $25 trillion. Part of this national debt can be attributed to the roughly $3 trillion that will be used for the coronavirus pandemic response, which is significantly greater than the $1.8 trillion used for the 2008 financial crisis bailout. This new debt load has many wondering if the United States will be able to pay off this debt.
The good news is I don't believe we have to worry about our country not being able to pay off our debt. The reason why I don't believe we will have an issue paying off our debt was recently articulated by Warren Buffett. Essentially Mr. Buffett stated we do not have to worry about defaulting on our debt because it is denominated in our own currency. When a country's national debt is denominated in its own currency that country can turn on the printing press as much as they want and create "new money" to pay off the debt. Some countries do not have this luxury and can face the very real possibility of defaulting on their debt.
Unfortunately, printing money comes at a cost. The cost associated with printing new money to pay off old debt is inflation. In other words, the current money that you have cannot buy as much as it once could. Let's take a walk down memory lane to get a historical perspective on what inflation has done.
Chart showing the annual rate of inflation in the United States as measured by the Consumer Price Index back to 1914. The current rate of U.S. CPI inflation as of June 2020 is 256.39. https://www.macrotrends.net/2497/historical-inflation-rate-by-year
The graph clearly illustrates that high inflation has not been an issue in recent years, but it has been an issue in the past. You can see that inflation hit double-digit numbers multiple times in the 1970s, and it even reached over 18% in the earlier part of the 1900s. The red bars in the '20s and '30s illustrates deflation, where the cost of goods actually went down during those years.
The reason that this graph is significant can be attributed to inflation threats for the future matching the reality of our past. Interestingly I find many people tend to worry significantly more about short term losses in the market compared to losing purchasing power in the future due to inflation. Perhaps this can be attributed to the lack of inflation in the recent past coupled with some temporary stock market declines. Ironically both losses in the market and the loss of purchasing power due to inflation have a similar impact due to the fact that both leave you with the ability to purchase less with your money albeit for different reasons.
Preserving money for short term needs through stable investments is important. Preserving purchasing power for future needs is equally important. Historically, the types of investments that have been good at preserving capital for short term needs have been different than the types of investments that have been good at preserving purchasing power and protecting against inflation for future needs.
Historically conservative bonds have been utilized by many astute investors wanting to avoid short term losses which can provide short term purchasing power. Unfortunately, conservative bonds have not done a good job beating inflation over long periods of time, which can cause investors to lose purchasing power on these types of investments. Conversely, stocks have historically done well, beating inflation over long periods of time but are not dependable for short term needs as they have temporarily gone down in value during many different times in the past.
We encourage taking a balanced approach that addresses both liquidity for short term needs while preserving purchasing power for future needs. Please remember the loss of purchasing power does not happen overnight it typically will quietly erode over time and is much less noticeable than a 30% drop in the stock market, but make no mistake it can be equally as dangerous when not prepared for properly. Hopefully, inflation does not rear its ugly head for several years. We also can only hope that our politicians will find the same inspiration that Tim McGraw found so we have a bright 30 years to look forward to in the future.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Stock investing involves risk including loss of principal. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
About the author
Ty Bernicke is the President of Bernicke Wealth Management and serves as a Senior Wealth Manager. Ty currently works with a limited number of clients that require wealth and/or investment management services. His research on investment management, retirement planning, and tax minimization strategies have been published or recognized by The Wall Street Journal, Forbes, The New York Times, Futures Magazine, and many other well-known national and international publications. Ty Bernicke and Bernicke Wealth Management give back to the community and environment through numerous charitable endeavors. Ty spends his free time with his wife, two daughters, and one son. He also likes to fish, golf, and exercise.
Certifications, Licenses, and Registrations
- Registered Principal with LPL Financial, Member FINRA/SIPC
- CERTIFIED FINANCIAL PLANNER™ professional
- Accident, Life, Health, Property, Casualty, and Variable Life/Variable Annuity Insurance Licenses
Education and Training
- Series 7, 66, 63, 24
- Bachelors Degree - Finance; University of Wisconsin-Eau Claire
- College for Financial Planning graduate