Another Financial Planning article by Kenneth L. Fisher, from May 1, 2007. Ken thinks deficits are good, up to the point where borrowing cost (the interest rate) almost equals the return on assets [profit maximization theory].
Pundits bemoan the fact that America’s official personal saving rate turned negative nearly two years ago, and has headed south ever since. Americans aren’t saving. Worse still, we’re allegedly drowning in debt on a personal level; and, on the national level, the government has profligate spending plans to drive the federal saving rate deeper into negative territory than ever before.
Most people are horrified about this. Americans have a near-religious aversion to debt. We agree that debt is bad, and lots of debt is downright immoral. Almost no one would say debt is good–unless he or she wants to be seen as a mentally infirm charlatan with malicious intent. Call me what you will. Debt is good.
Last fall (Financial Planning, November 2006), I showed you how to use the questions from my book, The Only Three Questions that Count, to debunk the fear that big federal budget deficits are bad for the economy and for stocks. In fact, by using the first of my three questions–What do you believe that’s actually false?–I showed that big budget deficits are actually great for the stock market. Historically, big deficits are followed by stock-market returns that are dramatically superior to those following surpluses–for as long as 36 months out.
Still, it may be hard to fathom why budget deficits are good, since they add to our overall debt. But if you use the second question–What can you fathom that others find unfathomable?–you’ll see that deficits are good because debt is good. Debt is so good, we could use much more of it. Just reading that sentence may enrage you. But anger is usually twisted fear, which can be addressed by my third question: What is your brain doing to blindside you now? The key is to untwist the fear to see reality better so we can make better stock-market bets.
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OUR OPTIMAL DEBT
Is the U.S. over- or under-indebted? Since we have total assets of about $120 trillion (according to the Federal Reserve Flow of Funds Account) and a GDP of $13 trillion, our return on assets is 11% after taxes–that’s very high. A current fair estimate of borrowing cost is about 6%, or 4% after taxes–much less than our return on assets. We’re not over-indebted. Instead, we’re falling far short of profit maximization–immorally so!
Enjoy — lots of good points. I’m just not yet convinced Ken is correct.
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