ARFS - Introduction - We Owe Nothing to Anybody. Oops! National Debt!

[Continued from ARFS - Introduction - Did Someone Say Inflation?]

Even if we as individuals do not owe any money directly to anyone, our nation does! It is more than $8.3 trillion! This means that an individual's share of the national debt is approximately $28000 as of 05/20/06. Click here to see the US national debt up to the penny. Let us find out what this implies as far as personal finance is concerned.

Who owes the money? The entire money is owed by the General Fund of the Federal government. It consists of the accounts used to carry out the general purposes of the government, rather than those accounts for funds earmarked for a certain purpose, i.e. trust funds. The government raises funds by issuing treasury bonds. These bonds are attractive to foreign investors because of the following salient features:

  • interest rates offered
  • stability and strength of dollar
  • universality of dollar (i.e. closest to a universal currency)
  • credibility of Uncle Sam

These treasury bonds might not be perpetually lucrative to foreign investors. Many factors may influence such an investing decision, few of which are:

  • Feds stop increasing or start decreasing interest rates. It cannot be increased for ever, it is not sustainable.
  • Dollar value weakens against other currencies.
  • Relatively stable growth markets emerge outside of US.
  • Due to unforeseen events the U.S. economy takes a hit.

If investors feel there is better opportunity elsewhere they may start selling dollar or their investments in US, leading to a potentially catastrophic downward spiral of a weak dollar and higher inflation. Argentine Peso lost 70% of its value overnight in 2001.

What can we do? To soften such a blow to our nest egg we ought to:

  • Diversify with discipline.
  • Invest in instruments that hedge against inflation (such as gold/precious metals).
  • Invest in world markets, emerging and developed markets outside of US as well.

A very wise step indeed would be to start reducing the national debt early on. The Feds may implement policies to that effect. However one of the many ways to do that would be to increase taxes. To counter that we should take full advantage of :

  • Tax exempt federal and municipal bonds.
  • Tax exempt accounts such as Roth IRA.
  • Tax deferred accounts such as 401(k) and traditional IRAs.

Thus we need to start investing early with a sensible and balanced plan.

An interesting news article for further reading is:

[Continued to ARFS - Introduction - The Verdict]

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