Concerned about growing government debt - what effects could this have?

Ash_Pole

I seem to be hearing more and more warnings about growing levels of public debt, both here and in the USA. If this does turn into a full on crisis, what would happen? Bond yields will rise I assume (prices falling), and the stock market will fall? Will inflation increase? What could I do to protect my investments?

El_Torro

Remember what happened when Greece was unable to service its debt? Something like that. Though if the US was unable to service its debt I'm not sure the IMF would come to the rescue, simply because it doesn't have 36 trillion US dollars sitting around. 

Incidentally I just checked and the amount the IMF is allowed / able to lend is less than 1 trillion US dollars to one country. 

Hyper inflation is possible, if the affected country decides to print money in order to service its debt. Less likely if the country simply defaults on its debt. 

Bonds issued by the affected country will essentially be worthless, since they're not servicing their debt. The fate of corporate bonds would be less certain. 

I'm not saying it's not worth worrying about the level of debt that the UK and the US (and many other countries) has. However in my personal view there's not much you can do about it. Your investments might be more or less OK, depending on how you are invested. I guess the old adage of diversification is more important than ever if you think a major economy might default on its debt soon. 

Hoenir

Ash_Pole said:

What could I do to protect my investments?

Be selective in choosing them. With or without a financial crisis. Paying over the odds for an asset is totally avoidable. Stopped clocks are always right twice a day. During every cycle the time continues to tick away and gets closer and closer. 

MattMattMattUK

Ash_Pole said:

I seem to be hearing more and more warnings about growing levels of public debt, both here and in the USA.

It is a general concern, but mostly because it eats into government's ability to spend, rather than any of the doomsday scenarios that some people like to push.

Ash_Pole said:

If this does turn into a full on crisis, what would happen?

That depends what you class as "full on crisis", everything from a mild drop in currency value, recession and economic stagnation to global economic collapse. 

Ash_Pole said:

Bond yields will rise I assume (prices falling), and the stock market will fall?

Possibly, or not. Bonds only rise if they are worth holding, if they look like defaulting then that can go in any direction. Stock markets might fall, or others might rise as safe havens where they have viable businesses that can weather the storm.

Ash_Pole said:

Will inflation increase?

Probably, due to currency devaluation, but only if it reaches "crisis" levels. If the crisis is in another major economy then inflation could turn into deflation, we could be seen as a safe haven and so currency rises could cause deflation.

Ash_Pole said:

What could I do to protect my investments?

Some people will say diversify, some people will say invest in markets or businesses they deem safe, others will say gold, farm stocks because people always need food etc. 

The reality is the predictions vary so wildly and many of them are based on either scaremongering, or trying to get people to invest in specific stocks or goods that those people have a vested interest in people investing in (eg. own a gold trading company, push online that gold is a safe option). If you are planning for a "full on crisis" then invest in canned food and ammunition, otherwise ignore the scaremongering and carry on. 

masonic

You could always visit https://usdebtclock.org/world-debt-clock.html and stare transfixed in horror, rather than tinkering with your investments.

There are those who have been concerned about national debt levels for many years. Nobody knows if or when there may be an adverse reaction to what has been the norm for a very long time.

If you are concerned, then short dated bonds have the lowest interest rate sensitivity. Inflation linked bonds are available for a positive real yield. So there are options for the nervous.

Hoenir

masonic said:

There are those who have been concerned about national debt levels for many years. Nobody knows if or when there may be an adverse reaction to what has been the norm for a very long time.

Between March 2020 and March 2022 the amount of US$ in circulation increased by 40%.  Much financed on a short term basis. For the remainder of 2025 and the 2026 fiscal year. The US is expected to have to refinance and borrow in total some $15 trillion.  Even Trump cannot bully the bond markets. Weak Treasury auctions ( particularly international demand) could really rattle the cage. 

MattMattMattUK

Hoenir said:

masonic said:

There are those who have been concerned about national debt levels for many years. Nobody knows if or when there may be an adverse reaction to what has been the norm for a very long time.

Between March 2020 and March 2022 the amount of US$ in circulation increased by 40%.  Much financed on a short term basis. For the remainder of 2025 and the 2026 fiscal year. The US is expected to have to refinance and borrow in total some $15 trillion.  Even Trump cannot bully the bond markets. Weak Treasury auctions ( particularly international demand) could really rattle the cage. 

They could, equally it could all get mixed up with the general economic uncertainty at the moment and be hard to differentiate between the different causes.

I deal with a wide range of sectors through work and none of them are positive. The last time things felt like they do was in 2008 but I suspect that the next few years could end up being a lot worse economically that that was. 

Hoenir

MattMattMattUK said:

Hoenir said:

masonic said:

There are those who have been concerned about national debt levels for many years. Nobody knows if or when there may be an adverse reaction to what has been the norm for a very long time.

Between March 2020 and March 2022 the amount of US$ in circulation increased by 40%.  Much financed on a short term basis. For the remainder of 2025 and the 2026 fiscal year. The US is expected to have to refinance and borrow in total some $15 trillion.  Even Trump cannot bully the bond markets. Weak Treasury auctions ( particularly international demand) could really rattle the cage. 

They could, equally it could all get mixed up with the general economic uncertainty at the moment and be hard to differentiate between the different causes.

If international investors weaponise Treasury bonds then yields will soon reflect their actions.  As they did a week or so back. When much of the issuance was left with the underwriters. While the Trump Administration cares little about the stock market. They are highly focussed on the 10 year Treasury bond yield. As this influences key lending rates in the domestic economy. 

Labtebricolist

I’d argue that there isn’t really a safe way to plan your way around an actual in your face US bond crisis - the US markets and the status of the dollar means it is just too big to avoid.  A stash of gold bars under the mattress or a hoard of premium bonds just isn’t going to cut it.

The most likely outcome of this sort of event (which I’d still say is at the far end of unlikely) is that the US seeks to restructure its debt and devalue its currency, and some (read Varoufakis’ analysis of US tariff policy, which is very interesting) might argue that this is the ultimate end game.  This won’t be good for non-US holders of US assets, but the subsequent market turmoil wouldn’t be good for non-US assets either.

Best plan is to stay diversified and stay in it for the long term, but if I were planning to crystallise investments in the next 3 years I’d probably be looking to take steps to do that in a measured way sooner rather than later.

Albermarle

If you look at the UK, then if things started to get out of hand the Govt can just break its election pledges and bump up taxes significantly. This kind of action would hopefully settle bond markets in the short term at least.

Hoenir

Albermarle said:

If you look at the UK, then if things started to get out of hand the Govt can just break its election pledges and bump up taxes significantly. This kind of action would hopefully settle bond markets in the short term at least.

Raising taxes excessively constrains growth. Law of diminishing returns.