Where are the Debt Collectors & US Inflation Rates
- The chart below shows the total US debt outstanding by year
- We are not macroeconomists, but we believe $29 trillion is a lot of money
- Do you really see the American public just hunkering down to pay that off?
Our Wednesday Quick Take on what we learned from John Kenneth Galbraith’s brilliant A Short History of Financial Euphorias reminded us that the US has a long history of welching on its debts. This week’s Chart for the Curious has several other charts we thought others would find of interest. Please read further to see our nation’s long history of dollar debauchery and more.
KCR has done a lot of writing about math lately. The equity duration work was a nightmare of greek letters and constantly adjusting formulas. The professor got involved in that one.
Participating in a series of recurring conversations about math with a Ph.D. in accounting is educational and tiring. While we believe the duration tool is superb, we have “macro envy.” And by macro envy, we just mean it’s a lot easier to write about really cool-looking charts, hence the motive for the remainder of this post.
While we do not believe anyone can forecast the future with much consistency, as documented in our research on inflation, the relevance of inflation risks and dollar devaluation became vivid. Inflation is no friend of equity investors – particularly in an environment like today.
As Galbraith not-so-gently reminded us, the US Revolution was funded by issuing Continentals in 1775. He elaborates that the US’ history with fiat money in the face of these large debts is hardly inspiring. The reason is that when those debts became too large, the population and government began to see no purpose in re-paying it. This psychological shift matters.
Despite the debt being held by the public and its soldiers, the currency was backed by expected tax receipts of the US. In the hope of moving forward with the whole freedom and economic growth part of our story, we printed Continentals until they became worthless in 1785.
For American critics of fiat currencies, we should be mindful that the use of confetti money bought our independence. As we stand at a time of meaningful geopolitical stress, we might also be wise to remember that the British aggressively worked to undermine Continentals. We should not be surprised to see our adversaries today pursue a similar route as this playbook is hardly new. An early lesson in the idea that free money is only “free” as long as the privilege and premise underpinning it are not abused.
The chart below begins in 1791, after Alexander Hamilton’s idea for a national bank came into existence. The bank was the “cure” for the debacle with Continentals described above. As you can see, despite intermittent flirtations with the gold standard, US inflation rates have taken their toll overtime on a free-floating dollar.
We stare at the chart on the first page and this chart here, and we are not bullish on our prospects for repayment of the government debt. At least not in dollars with constant purchasing power.
The two charts below are designed to help bring some context to our first chart showing that the national debt has hit $29 trillion. In the first chart on the left, the dark blue bars show the cumulative change in our debt since 1973 has been over 6,000%. The light blue bars show that over that same time US GDP has grown only 1,452%.
The second chart on the right expresses this as the debt to GDP ratio. The 2008 financial crisis caused the first major gap up. And now, the Covid-19 pandemic served as the second major boost.
Inflation is a time-tested American tradition and is politically very appealing. Right now, the government has people buying 10 years of risk for just over 1% while consumer prices rise at 5%, and the federal debt is hitting new highs.
In the short term, we have no idea if buying 10 or 20-year treasuries is a good or bad “trade.” 10 or 20 years from now, however, we believe the idea that people lent money at ~1% while food and energy prices soared will be discussed with incredulity. The image below shows how, in the 20 years after 2000, a period where CPI averaged ~2% annually, the negative impact on purchasing power was still dramatic.
If you just want to find high-quality small caps and mid-cap stocks that are trading at modest valuations, see our research on those topics here, here, and here. Overall the KCR research team believes that the manic bubble in tech stocks today has left some of the highest quality and most profitable firms trading at reasonable valuations.
For those who still believe that value investing has merit, we have a simple piece out identifying the few stocks trading at less than 10x earnings. We have another full white paper on stocks that are growing sales at 5% or more but still trade at a 10% FCF Yield. In that piece, we called such firms “Flying Fortresses” after the B-17 bomber due to their historical ability to sustain significant damage while still generating outsized returns.
As always, we thank you for your interest in our work!