America’s economy is in a mess. It makes absolutely no sense that an economy that is worth US$27.7 trillion is carrying debts of US$36.2 trillion. If America was a company, would you even consider investing in it?
Around 20 years ago, the US national debt was US$10 trillion. And 20 years before that the national debt was only US$5 trillion. The national debt has increased more than sevenfold in 40 years. So, we ask ourselves the same question again: would we invest in a company whose debt has increased 600% in 40 years?
In September last year, America, for the first time, paid more than US$1 trillion on the money that it owed. That is money that it would not have needed to pay if the national debt had not ballooned over the last four decades.
The former Treasury Secretary has said that the national debt was not a problem. Instead, Janet Yellen said we should consider whether the interest payments are affordable. In her view, the payments on the loan are manageable. So, the debt, by implication, is also manageable.
However, debts are only manageable if lenders are prepared to wait patiently to get their money back. But more importantly the borrower should be credit-worthy. It is not dissimilar to an individual with a massive credit-card debt. Perhaps the interest payments on the outstanding balance is manageable. But if we continue to rack up more debts, then at some stages, those interest payments could be a cause for concern.
America is in trouble. It needs to do something. It needs to do something drastic if it intends to wean itself off increasingly more debt. It needs a short, sharp shock to bring its finances back into the black.
But I am not sure that protectionist trade policies, cracking down on immigration, slashing government spending and scaling back on regulations on U.S. businesses is the right strategy.
But those are precisely the methods that have been employed by the current US administration. Will penal import tariffs bring manufacturing back to America? Will deporting immigrants boost the workforce? Will indiscriminate closing of government departments provide sufficient savings to square the budget? And could reining in regulations have unpleasant unintended consequences.
It is little wonder that markets have taken fright. Investors need predictability. The US administration’s scorched-earth policy does not instill any level of certainty. If anything, it has sown confusion and doubt in the minds of consumers and businesses.
Confidence drives an economy. It encourages consumer spending. It promotes investment. Uncertainty does the opposite. Whilst the US administration is reluctant to predict recession, it has nevertheless predicted a period of disturbance, which is a euphemism for an economic downturn.
Recession is nothing to fear, though the market has obviously taken fright. Long-term investors should continue to focus on companies with pricing power. Focus on the things that people can easily afford and the things that people can’t easily do without. Focus on companies that generate cash. A market downturn could be a great buying opportunity.
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Disclosure: David Kuo does not own any of the shares mentioned.
