“Here’s a little song I wrote
You might want to sing it note for note
Don’t worry, be happy
In every life we have some trouble
But when you worry you make it double
Don’t worry, be happy
Don’t worry, be happy now”

The Wall Street Journal recently described a view held by some economists that rising U.S. federal debt is little cause for worry. Indeed there is a school of thought “Modern Monetary Theory,” or MMT, that subscribes to this notion.

Should investors be worried, or instead take Mr. McFerrin and the MMT crowd to heart?

To the extent federal debt rises relative to the economy’s ability to service it, there is cause for concern. Since the beginning of the last recession, federal debt has risen from 70 percent of GDP to over 100 percent. Our parent, AIER, recently addressed the matter:

“If the confidence of investors in the ability of the government to repay debt without inflation wanes, interest rates can move quickly, leading to feedback that further degrades the ability of the government to pay its debts. This is the process that makes debt crises arise like an earthquake as opposed to a rising tide.

Crisis is not unthinkable. The size of the U.S. debt in terms of national GDP ranks 16th worldwide. Of those countries that rank ahead of the United States, few represent vibrant economies. (Japan is a notable exception.) The United States is the world’s largest economy, so it is difficult to imagine that the U.S. economy can simply grow out of the problem. As the problem looms, investors will surely have this in mind. Politicians must face these difficulties now if they are to defuse a financial crisis worse than the last.”

Investors surely do have this in mind. There is no reason to think markets do not reflect federal debt or spending concerns, or that the probability of a sudden debt crisis is not reflected in current valuations. But markets are also aware of good news. Investors for example are not blind to emerging technologies such as 5G, 3D printing, and blockchain, or to advances in artificial intelligence, energy research and health sciences. All of these have potential to expand productivity at an unprecedented rate. The fact is, information, good and bad, is readily available and these are among the most widely discussed topics in the news. Indeed we suspect global stock market indexes would be well above their current levels in a world identical to ours except that federal debt was, say, only 50 percent of GDP.

So, should investors worry? It is important to understand that rising federal spending and debt pose a threat to prosperity. But this is no reason to doubt the efficacy of free markets, including the notion that capital markets provide the best estimate of value in light of available information. It would be folly to abandon one’s investment strategy by second-guessing this wisdom.

Also in This Issue:

Knowing When to Buy . . . and Sell
Alternative Reality
How to Start A High-Yield Dow Portfolio
Freezing Your Credit File
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield
Recommended Investment Vehicles