Why You Shouldn't Panic About Government Debt

I have a long time client who is always convinced that the financial sky is falling. Recently he called me, worried that the nation is $19 trillion in debt. He's not alone in this worry -- $19 trillion sounds like a lot. But is that a real number? And how fast is the debt train hurtling towards us?

So I decided to do some research.

In the most recent audit of the Bureau of Fiscal Services for fiscal years 2014 and 2015 by the Government Accountability Office, the total gross federal debt outstanding is $18.138 trillion. That's 4.5% less than $19 trillion. Don't you feel better?

Here's one of the most interesting facts I uncovered. Nearly one third of the outstanding debt, 27.6% to be exact, is held by federal government agencies such as the Social Security Administration, FDIC, the Postal Service Retirees Fund, or the Department of Labor's unemployment trust fund.

If we subtract federally held debt then that means that $13.12 trillion of what the report refers to as marketable securities (they can be resold at any time) are held by the public.

But all this debt is going to mature one day? Yes it is. In fact, some of it comes due very soon.

58% of all marketable federal securities held by the public, worth $7.4 trillion, mature within the next four years. The remaining 42% stretches all the way out to 2045.

Will the government retire over $7 trillion in debt by 2020? My guess would be no. Will the wheels fall off of our society and spiral into a "Mad Max" style existence? Probably not. What will happen? Have you ever refinanced a 30-year mortgage?

The short version: more than likely, the government will be able to refinance $7 trillion at decent rates as it gets its fiscal house in order. And rates, no surprise, will remain stubbornly low. But what would you rather have, low interest rates or fiscal Armageddon?

So what do investors do? Large cap, dividend paying blue chip stocks should be a cornerstone of a moderate investment portfolio. Investors should pay careful attention to valuation metrics such as forward P/E ratios and stock price relative to 52-week highs. Companies should have strong franchises, deep moat businesses with solid balance sheets and operating histories. Winners would include names such as Cisco Systems (Nasdaq: CSCO), Apple (Nasdaq: AAPL), Wal-Mart (NYSE: WMT) and pharma giant AbbVie (NYSE: ABBV).