March 13, 2025 • 30 mins
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We examine the debt ceiling crisis and its implications for investors, revealing how this political standoff reflects deeper problems in America's fiscal health that could impact global financial markets and your portfolio.
• Debt ceiling is a uniquely American concept (shared only with Denmark) limiting federal government borrowing
• Official national debt at $40 trillion excludes $25-30 trillion in unfunded Medicare, Medicaid, and Social Security liabilities
• Rising interest rates have increased annual debt servicing costs to nearly $1 trillion
• Foreign ownership of US debt includes Japan (12.7%), China (8.9%), UK, Luxembourg, and Cayman Islands
• Investors should consider maintaining cash reserves and diversifying beyond Treasuries
• Economic growth through improved immigration policies could help address the debt-to-GDP ratio
• Current political focus on tariffs is "puffery" distracting from real solutions to debt problems
• Per capita national debt now exceeds $106,000 for every American
Be careful out there as an investor - have a plan B and stay balanced, flexible and ready to adapt as economic conditions change.
Straight Talk for All - Nonsense for None
Please check out our other podcasts:
https://skepticsguidetoinvesting.buzzsprout.com
Disclaimer - These podcasts are not intended as investment advice. Individuals please consult your own investment, tax and legal advisors. They provide these insights for educational purposes only.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Steve Davenport (00:02):
Hello everyone and welcome to Skeptic's Guide
to Investment.
This is Steve Davenport and I'mhere with Clem Miller and we
want to talk about the debtceiling certainly in the front
of the news and it's certainlysomething on a lot of people in
Washington's plate, but how doesit affect the average investor?
What is the average personsupposed to do with this, and
(00:23):
should they be concerned, orshould they just turn away and
turn to another streamingchannel and watch some more?
Love is Blind.
I think that, as Americans, wehave a responsibility to be
prudent and educated, and Ithink it's good to understand,
and so we'd like to, in the next20 minutes, kind of just go
(00:43):
through some of the basics, andwe think that by doing that,
you'll be able to place the debtceiling in the proper
perspective to all the otherthings you have going on in your
life.
Clem, what do you think are thekey points about the debt
ceiling that the averageinvestor needs to know?
Clem Miller (01:02):
Okay, so you know definitionally.
First, we're talking aboutfederal debt, right, that is,
T-bonds and T-bills.
We're not talking about statedebt, we're not talking about
private debt, it's only federalgovernment debt.
So that's one thing.
Second thing is, we're talkingabout a ceiling, which is a
(01:24):
ceiling on the overall stock ofdebt.
We're not talking about aceiling on debt service, right,
we're talking about a ceiling onthe stock of debt.
That's second thing I would say.
Third thing I would say is that,given the fact that every year
(01:44):
we typically have a deficit Ithink the last time we didn't
have a deficit was back in theClinton years Every year we have
a deficit that adds on to thedebt, so that the debt keeps
growing year after year afteryear, and that necessitates
(02:06):
increases in this debt ceiling.
So that's the third thing Iwould say.
Fourth thing I would say isthat the US is one of the very
few countries I think maybethere's only one other country,
Denmark, I think which has adebt ceiling country Denmark, I
(02:27):
think which has a debt ceiling,because I think most countries
realize that it's impractical toactually have a debt ceiling
because you're going to actuallyhave to raise it frequently in
this current environment.
So I think that's you know.
And of course, the idea of adebt ceiling emerged in a period
when there wasn't as much debtgoing on.
(02:50):
It wasn't being taken on asfast as it is today, and so you
have more frequent occasionswhen you reach the debt ceiling.
And then that was the fourththing.
No-transcript.
Steve Davenport (03:34):
Let me just add two or three items.
One item that I think needs tobe considered is Medicare,
medicaid, social Securityliabilities are not included in
the debt ceiling.
So when we look at the USeconomy I'm going to throw out
numbers, Clem, and you cancorrect them if they're off by a
lot, but I believe that rightnow the US economy has
(03:55):
production capability or GDP ofabout 30 trillion.
I think we're at about 40trillion in our current debt and
treasuries and otherinstruments.
I think that the SocialSecurity, medicare, medicaid
liabilities that are unmet wouldadd another $25 to $30 trillion
(04:15):
.
So that would put us.
If we were to include thosewhich I think they're real
liabilities, and I think ifanybody tried to cut them, there
would be some real distress inthe United States.
So that really puts us.
If we take 40 plus, let's say,20 for those things instead of
25 or 30, that puts us at 60,which was as a 200% ratio of the
(04:43):
debt to GDP.
But the biggest part I thinkthat we're missing from this
debt discussion is interestrates are much higher.
When interest rates were nearzero, guess what?
Servicing the debt was a $200billion or $300 billion exercise
.
Now we're at $900, close to atrillion in interest.
(05:06):
So that means every year we'regoing to have to service almost
a trillion dollars more than anydefense budget, more than any
other element in our economythat the government is involved
in will be debt service.
(05:29):
Debt service is a cost, and ifthe interest rates don't come
down which I hate to say this,glenn, but tariffs lead to
higher interest rates.
Higher interest rates lead tothe government debt service
being even larger.
So the amount of debt we have,it's one problem.
It's not even truly the wholedescription of the problem.
(05:50):
It's only a description of thestuff they keep track of, which
is treasuries and othersecurities not including
Medicare, medicaid and SocialSecurity Irrational.
Why don't we include them?
They're real liabilities,they're really obligations that
we intend to pay.
Are they like a treasury?
And so therefore, I say, if wereally want to get serious, we
(06:15):
need to get the whole problemout.
And then we start talking aboutthe whole problem and we start
talking about lower rates, whichwould then say tariffs in these
activities with our tradingpartners aren't lowering
interest rates.
Therefore they can't be goodfor the overall economy, because
we can't keep growing andpaying for things with our
(06:38):
credit card when we should justsay let's cut the credit card up
, let's go to some type of alimited.
Just say let's cut the creditcard up, let's go to some type
of a limited.
I like your idea making itEuropean-like, with the idea
that it's based on the overalleconomy and a percentage above
the economy.
Okay, let's say it's a ceilingof 150% of GDP and if we
(06:59):
included Social Security, it's200.
I think you have to startsomewhere, which is where I have
the biggest frustration here,because of all the things I've
heard of with closing borders,opening borders, foundries,
moving semiconductors not movingsemiconductors.
Everything we talk about isirrespective of the biggest
(07:22):
problem we face, which I believeis the deficits and the debt.
Is that?
Am I being?
Clem Miller (07:27):
too alarmist.
No, I think you're absolutelyright and let me, let me ask you
a question, Steve.
Oh is it going to be?
Steve Davenport (07:36):
hard.
Clem Miller (07:37):
No, it's going to be very easy.
No, it's actually semi-easy.
Let's say we do have a defaulton this debt, that the debt
ceiling isn't raised in time,that you have a default on part
of the debt, or let's say thatthere's a higher prospect of
default because the debt ceilinghas been reached.
(07:58):
What do you think the ratingagencies would do the credit
rating agencies and how wouldthe market respond to a
downgrade?
I mean, there was a downgrade afew years ago during one of
these episodes, but if there aremore downgrades, how do you
think interest rates wouldrespond to that?
(08:20):
On to that, as you and I know,the CFAs.
Steve Davenport (08:26):
When the uncertainty rises, the interest
rates rise.
So therefore, I would say, ifthere's a debt downgrade, then
that's saying there's lesscertainty in the US paying all
of its debts, and I would saythat would cause higher rates
and it would make the problemworse.
So therefore, I look at this asa problem that we need to face
(08:47):
sooner, not later, and I alsolook at how we think about the
debt and how we think about this.
If we were having, you know, ifwe had Miller Corp and
Davenport Corp, and we looked atour lives, what have we done in
our life?
We've gone to a point wherewe're trying to reduce debt so
that we can more easily managecash flow.
(09:10):
And I look at us and say, hey,we want to invest in these
starting industries, we want tohelp this industry in the US, to
help onshore.
All of these things are outthere that we could be doing,
but we can't because we are sohamstrung by debt.
The one thing I've heard thathas been the most frightening is
(09:31):
that I've heard, since we'vehad this incident, where all of
the Russian assets that werepart of the SWIFT system were
basically commandeered bywhatever organizations that were
part of the Ukraine alliance,and so those Russian assets that
were in the system werebasically taken over, and those
(09:53):
assets are being used now to tryto help the Ukraine rebuild.
That decision to take a systemthat had rules and regulations
and guidance and never includedthe ability to isolate one
member was really a pretty bigdecision by the US Treasury, and
what I would say the nextdecision that could come down
(10:15):
the line that will be equallyoutrageous would be.
Well, if that country is doingthings we don't like and we want
to send a message, what if wesaid that the Chinese debt
didn't deserve interest payments?
Because their behavior is soanti-US that we feel they
shouldn't be a part of thesystem, they need to be punished
(10:38):
, and the way we punish them isto not pay interest.
It would help our budgetdeficits, it would help our
overall economy, but what wouldit mean to the world in terms of
buyers of US treasuries?
If you are on the wrong side ofthe US in terms of not getting
along and not agreeing totariffs and other things, we'll
(10:59):
just stop paying the interest onyour debt.
The debt that you own of the USwill suddenly become worthless.
Not worthless meaning it has novalue, but just if you have no
interest payment and you simplyhave principal, what do you do?
Do you sell that to anothercountry?
Are they going to pay you forthat debt having an interest
(11:22):
payment, or are they going tohave to?
You're going to have to take adiscount to that so that the
other person can get it, andwhen that other person gets it,
they get an automatic increasebecause that country has a good
relationship with the US andthey can collect the interest.
So there are things that arebeing discussed and some of them
(11:43):
seem outlandish, but we have apretty outlandish situation with
our debt and I don't thinkwe're even talking about the
right picture.
We're talking about a picturethat doesn't include almost half
of the obligations that we haveas a country, so we're not
really thinking about the fullobligations.
(12:04):
We know that.
You know Social Securityincreases and all of the things
involved in Medicare.
If we don't get a hold of ourMedicare costs, that's going to
be more.
That's a bigger liabilitytrillion I should have probably
(12:27):
said 30 trillion, in which caseyou'd be more frightened and
you'd be more likely to act.
But I want to stay skeptical,and not soon.
Is that fair, colin?
Clem Miller (12:34):
Yeah, I mean, I think you've outlined a, you
know, a kind of a nightmarescenario where you have a
selective default that's theterm used where you know the US
might pay.
Well, certainly it would payits own citizens.
Steve Davenport (12:53):
I think we'd pay Japan and I think we'd pay
England and I think we'd pay.
Clem Miller (12:58):
I think we'd pay Japan, and I think we'd pay
England, and I think we'd payI'm not sure if the systems are
available.
I guess Elon Musk would know,because he invaded them right.
Steve Davenport (13:11):
When we went to SWIFT, we knew which assets
were Russian, didn't we?
When we went after?
Clem Miller (13:16):
well, because, because, uh well, the swift
system is about banks right,about bank deposits, and it
doesn't involve us.
It's a different issue, but ithas the same kind of analogy in
the sense of um, you know,you're using a global financial
system in order to, uh, in orderto reinforce sanctions, right
(13:39):
and and and.
The scenario you outline itwould be selective default on US
treasuries as a form ofsanction, and I think that it
depends on the effectiveness ofthat.
I mean, putting aside marketimpacts, but the effectiveness
of that Putting aside marketimpacts, but the effectiveness
(14:00):
of doing that requires havingknowledge as to who actually is
holding those treasuries, andI'm not sure that that
information is readily available.
Steve Davenport (14:17):
I mean, there has to be, there was a whole
group of people that were veryworried that our treasury system
was being overrun by theJapanese and the Chinese.
They were going to own so muchtreasury that we were not going
to be able to say no, and theywere going to take over the
country.
Clem Miller (14:33):
Yeah, that's kind of nonsense now.
Steve Davenport (14:37):
But in the 70s and 80s, I remember hearing it,
I remember thinking oh wow, theChinese are going to own
everything.
Clem Miller (14:44):
I mean they do hold a lot, but the vast majority,
vast majority of US treasuriesare owned by US citizens.
Steve Davenport (14:53):
Really, I thought it was close to 20 or 30
percent international no.
Clem Miller (14:57):
Let me check.
I thought it was close to 20 or30% international.
No, let me check Vast majority.
I mean 80% is is vast majority.
Okay, unless you think 90%, 95%is vast majority.
I mean we can look it up, but Ithink I think 20% sounds about
right and I think I think Japanwas the largest in that.
(15:20):
I know UK had a lot.
China, the Gulf states we can'tforget about them.
They had a number of treasuries.
China, certainly, but we don'tknow among those Chinese
holdings, we don't know thatit's the government of China or
(15:42):
Chinese banks or Chineseindividuals.
I mean there's a lot.
This would be a verycomplicated, this selective
default business would be verycomplicated to organize.
Steve Davenport (15:52):
Top foreign owners of US national debt Japan
12.7.
China 8.9.
So almost exactly 21.
So Cayman Islands andLuxembourg, which I think is
kind of interesting.
Clem Miller (16:11):
How much is in Cayman Islands and Luxembourg?
Steve Davenport (16:14):
397 billion in Cayman.
Um 397 billion in cayman.
Clem Miller (16:25):
Uh, luxembourg was um yeah, is the fourth largest
holder, um per capita 128 000these are, these would be people
who don't want the usgovernment to know, uh, who they
are right.
They're nominees, so to speak,and so we don't know who those
(16:46):
people are right.
Steve Davenport (16:50):
Right, but that doesn't mean we can't save a
few US dollars and not pay themtheir interest, does it yeah?
Clem Miller (16:53):
because I mean, you know, cayman Islands, it's a
bunch of mailboxes, right, bunchof PO boxes.
A bunch of mailboxes, right, abunch of PO boxes.
Steve Davenport (17:01):
I like mailboxes.
I have a mailbox and I likewhen it chucks in there and it's
my interest payment.
I mean, what are you going tothink against mailboxes?
Luxembourg is 425, and the UKis 765.
And they're in third place at8.9.
They're almost tied with China.
(17:21):
Yeah, china is 768.
Clem Miller (17:25):
And how much is US?
Steve Davenport (17:29):
Well, this is the top five foreign owners, so
I don't know what the overallpercentage is, but Japan had a
trillion.
I mean, I think they're good,right, we still like Japan.
So I think the big question isChina, and will China, will we,
ever resort to that type oftreatment of another country?
(17:51):
If there's, I'm going to go outon a limb here and say if
something happens with Taiwanand the US is looking for ways
to punish China for invadingTaiwan, that's it.
That's a pretty strong reaction.
But I think that's, you know, inpeople's testing of different
(18:14):
strategies and I don't think Ihave to agree with that.
Clem Miller (18:15):
Yeah, of different strategies, and I don't think I
have to agree with that.
Steve Davenport (18:17):
Yeah.
So all I'm saying here, and Ithink all we're really trying to
say, is that the debt ceilingis an indicator of a much bigger
and broader issue, which is howdo we exist among other
countries with the use of ourassets, the use of our currency?
And, if we do think about it,are there extreme situations
(18:41):
where we might make a decision.
That is, I've heard, there willbe no default.
But I also think when you starttalking about it, you're
immediately bringing up thepossibility.
I mean, I think it's out thereand I think it's being thought
about and it's being talkedabout.
I think we should think aboutit as investors, because it
(19:02):
would sure make the corporatedebt of J&J, which is still AAA,
much more valuable, wouldn't itIf you were in another country
and you owned J&J debt insteadof owning treasuries?
Clem Miller (19:16):
I think it suddenly makes gold a lot more valuable.
It suddenly makes gold a lotmore valuable, warren IRWIN.
Steve Davenport (19:20):
It makes gold a lot more valuable.
It makes a lot of things morevaluable, and that's, I guess,
what I'm trying to say.
For investors, some of thethinking that you have to go
through is what is a worst casescenario and how do I prepare
and stabilize what is our needfor income and our need for
growth, and how do we balanceboth, such that our portfolios
(19:45):
will change and will evolve, butthey will still be trying to
satisfy those two objectives?
Right, I want to havereasonable growth and I want to
have income that will allow meto live the kind of life I want
to live, and I think, once youstart disrupting the SWIFT
system and start disrupting thetreasury system, you're talking
(20:08):
about two areas that, fordecades, have been kind of
stalwarts in our economy, and Ithink that the fact that we're
even talking about it is notgood.
I don't think it's a zeroprobability, I don't think it's
100.
I don't think it's 20.
But the fact that we'rethinking about these things
(20:29):
means that we have a problem andwe need to address it, and I
think that, overall, thoughtfulpeople would say this is the way
I would run my business if Iwas the CEO or I was the
president.
Why would we want to have thistype of management with all the
(20:49):
assets in the United States, allof the things that we have at
our disposal to run ourgovernment more effectively?
To run our government moreeffectively?
It feels like we're grasping atstraws and we're doing things
that are out of sync with whatreasonable people should expect,
and I don't think that's apolitical statement.
I think that's everyone'sresponsibility, republicans and
(21:12):
Democrats, and I think the factthat we've gotten to this
situation is everybody's fault.
It isn't one, it isn't a Bidenproblem.
There's plenty of blame to goaround.
What we have here is a problemwith debt, and the solutions are
to pay the debt and hope thatwe grow faster and if we grow
(21:37):
faster than the debt grows, thenwe will pay some of it off or
we need to do something with areallocation of some of that
income to paying off debt.
And my last comment will be Ibelieve one of the things that
will come up when we talk aboutthis tax cut extension is should
(21:59):
any of the income that comesfrom the extension not being
extended?
That money wasn't planned oncoming in.
Therefore, could that money beallocated towards the debt, and
in that way, the whole countrywould not be happy that their
tax rates went up, but I wouldcertainly be more happy that
(22:19):
some of my money that was goingto the government was going to
lower the national debt.
I think that per capita it's avery large number, and I'll
probably get that to you by theend of this podcast.
What do you think, clem?
Clem Miller (22:35):
uh.
Yeah, I think I agree with youthat there has to be uh, some
attempt to reduce, uh to startpaying back or slowing some of
the growth in the debt.
I think slowing growth in debtis a more realistic objective
(22:58):
slowing it so that thepercentage of GDP, the debt as a
percentage of GDP, starts toshrink.
I think that's a logicalobjective.
I think the way to get there isby a combination of less tax
(23:18):
cut, less continuation of taxcut and or cuts in government
spending.
So I think that's got to be theway to handle that.
Steve Davenport (23:33):
As of early 2025, the national debt per
capita, that's, with $36.2trillion in the national debt
and $332 million US population,is $106,000 for every man, woman
and child in this country.
Of course, you don't pay debtwith people, right?
(24:02):
I don't know.
But I'm saying if we had to layeverybody responsible for their
own debt, um, then you know wecould all make a contribution
equal to our amount of thenational debt and I'm sure the
four or five hundred people whodid that would help reduce some
debt.
But yeah, I I think the imageryis still real, meaning, yeah,
$100,000 of debt per capita, andI look at my taxes and I say,
(24:24):
ok, how much is going to run thegovernment?
And if they took 5% of my taxesand applied it to the debt,
would I think that's a good move?
I agree.
First you have to control thegrowth, then you have to go
after actually lessening theamount of debt, and the way you
do that typically is to growyour way up.
(24:45):
I'm not sure if interest ratescontinue to rise, that growth
out of it is going to.
We're going to have to achievean exit rate of 7% or 8% for GDP
, which is not sustainable, of7% or 8% for GDP, which is not
sustainable.
So when we have a growthymarket, we're talking 4% to 5%
(25:07):
GDP.
Now we're talking 2% to 3%.
So can we double the growthrate of the economy and come up
with some solutions?
I think it's going to be hard,but we got to look at it.
I don't think that not lookingat it has really worked for us.
I don't think we've naturallyhad an affinity away from it.
I think we've had an affinityfor it.
Clem Miller (25:29):
So, steve, let me just make one last comment, and
I know we have to run, but theone way that we can one tool we
(25:56):
can use in order to help reducethe debt, that is, to reduce the
debt as a percentage of GDP.
Steve Davenport (25:57):
By increasing GDP is to encourage immigration
into the United States Correct,I agree, there's lots of like, I
think, our immigration policy.
I mean we've talked about it.
I mean we've got PhDs andmaster's students who are being
sent back to their countriesbecause we don't want to give
them any path to citizenship oran ability to work here.
Clem Miller (26:11):
But even those who are less educated, you know,
provided that they aren'tactually violent criminals,
right?
Why not encourage them to comehere and pay taxes and use their
tax revenues to help pay down?
You know, pay down the debt orslow down the growth of the debt
(26:32):
.
Why?
Steve Davenport (26:33):
not.
We could tie the two together.
I mean, I don't know what'sgoing to happen to the $5
million golden visas thatTrump's giving out.
I mean, is the $5 million goingto go to pay off the debt or is
it going to go to pay off thetariffs?
I mean, there are a lot ofsolutions here, clint, but all I
(26:54):
know is that we're talkingabout tariffs on steel and
aluminum and we're talking aboutwine tariffs of 100%, and I
think those are the wrongconversations.
Yeah, do you?
Clem Miller (27:07):
Yeah, I think tariffs is an entirely different
discussion, but I don't thinkthe tariffs are going to be—
it's a distraction.
It's a distraction, it's adistraction and and you're not
going to get the sizablepersistent level of income that
you need from tariffs, uh, tohelp resolve this debt problem.
Steve Davenport (27:32):
Right.
I don't think it's the.
I don't think it's the answer.
I don't think it's close to theanswer.
I think it's more answer.
I don't think it's close to theanswer.
I think it's more puffery.
Yeah, and I don't think thatthat has been, you know,
trademarked yet, but I'm goingto say it here.
Puffery is my description ofwhat's going on and it will be
(27:53):
continued to be in my discussionuntil we really start talking
about some of the more seriousissues in my discussion, until
we really start talking aboutsome of the more serious issues.
So, as investors, be careful outthere, because some of the main
issues still aren't being dealtwith and therefore, that's why
you hold a position in somefixed income securities or cash
to try to make it so that, if wehave a worst case scenario and
(28:15):
some of the debt weren't paidbecause of an invasion of Taiwan
or whatever the situation, wehave some cash and bonds that we
can use to buy back some ofthose assets at a better price
in the future.
Not something I want to do.
I don't want to see a 30%decline so I could buy more
stocks.
I would rather see us try to dothings to create value right
(28:36):
now and we move on from here.
But I think that what you haveto do as an investor is
sometimes you have to have aplan B, a plan C, a plan D, and
I think that all of us need tojust be a little more careful
and try to stay balanced andflexible and able to move in
different directions as the tideor the government changes.
(29:03):
Anything else to add?
Clem?
Nope, that's it All right.
Thank you everyone.
I enjoy having you as listeners.
We enjoy doing this to help youimprove your investing IQ and
we hope to have some greatguests coming up Fraser Rice and
(29:24):
Steve Petuso and we just wantto continue to give you value in
terms of ideas to help yourinvestment portfolio and your
investment IQ.
Thank you,
Hello everyone and welcome to Skeptic's Guide
to Investment.
This is Steve Davenport and I'mhere with Clem Miller and we
want to talk about the debtceiling certainly in the front
of the news and it's certainlysomething on a lot of people in
Washington's plate, but how doesit affect the average investor?
What is the average personsupposed to do with this, and
(00:23):
should they be concerned, orshould they just turn away and
turn to another streamingchannel and watch some more?
Love is Blind.
I think that, as Americans, wehave a responsibility to be
prudent and educated, and Ithink it's good to understand,
and so we'd like to, in the next20 minutes, kind of just go
(00:43):
through some of the basics, andwe think that by doing that,
you'll be able to place the debtceiling in the proper
perspective to all the otherthings you have going on in your
life.
Clem, what do you think are thekey points about the debt
ceiling that the averageinvestor needs to know?
Clem Miller (01:02):
Okay, so you know definitionally.
First, we're talking aboutfederal debt, right, that is,
T-bonds and T-bills.
We're not talking about statedebt, we're not talking about
private debt, it's only federalgovernment debt.
So that's one thing.
Second thing is, we're talkingabout a ceiling, which is a
(01:24):
ceiling on the overall stock ofdebt.
We're not talking about aceiling on debt service, right,
we're talking about a ceiling onthe stock of debt.
That's second thing I would say.
Third thing I would say is that,given the fact that every year
(01:44):
we typically have a deficit Ithink the last time we didn't
have a deficit was back in theClinton years Every year we have
a deficit that adds on to thedebt, so that the debt keeps
growing year after year afteryear, and that necessitates
(02:06):
increases in this debt ceiling.
So that's the third thing Iwould say.
Fourth thing I would say isthat the US is one of the very
few countries I think maybethere's only one other country,
Denmark, I think which has adebt ceiling country Denmark, I
(02:27):
think which has a debt ceiling,because I think most countries
realize that it's impractical toactually have a debt ceiling
because you're going to actuallyhave to raise it frequently in
this current environment.
So I think that's you know.
And of course, the idea of adebt ceiling emerged in a period
when there wasn't as much debtgoing on.
(02:50):
It wasn't being taken on asfast as it is today, and so you
have more frequent occasionswhen you reach the debt ceiling.
And then that was the fourththing.
No-transcript.
Steve Davenport (03:34):
Let me just add two or three items.
One item that I think needs tobe considered is Medicare,
medicaid, social Securityliabilities are not included in
the debt ceiling.
So when we look at the USeconomy I'm going to throw out
numbers, Clem, and you cancorrect them if they're off by a
lot, but I believe that rightnow the US economy has
(03:55):
production capability or GDP ofabout 30 trillion.
I think we're at about 40trillion in our current debt and
treasuries and otherinstruments.
I think that the SocialSecurity, medicare, medicaid
liabilities that are unmet wouldadd another $25 to $30 trillion
(04:15):
.
So that would put us.
If we were to include thosewhich I think they're real
liabilities, and I think ifanybody tried to cut them, there
would be some real distress inthe United States.
So that really puts us.
If we take 40 plus, let's say,20 for those things instead of
25 or 30, that puts us at 60,which was as a 200% ratio of the
(04:43):
debt to GDP.
But the biggest part I thinkthat we're missing from this
debt discussion is interestrates are much higher.
When interest rates were nearzero, guess what?
Servicing the debt was a $200billion or $300 billion exercise
.
Now we're at $900, close to atrillion in interest.
(05:06):
So that means every year we'regoing to have to service almost
a trillion dollars more than anydefense budget, more than any
other element in our economythat the government is involved
in will be debt service.
(05:29):
Debt service is a cost, and ifthe interest rates don't come
down which I hate to say this,glenn, but tariffs lead to
higher interest rates.
Higher interest rates lead tothe government debt service
being even larger.
So the amount of debt we have,it's one problem.
It's not even truly the wholedescription of the problem.
(05:50):
It's only a description of thestuff they keep track of, which
is treasuries and othersecurities not including
Medicare, medicaid and SocialSecurity Irrational.
Why don't we include them?
They're real liabilities,they're really obligations that
we intend to pay.
Are they like a treasury?
And so therefore, I say, if wereally want to get serious, we
(06:15):
need to get the whole problemout.
And then we start talking aboutthe whole problem and we start
talking about lower rates, whichwould then say tariffs in these
activities with our tradingpartners aren't lowering
interest rates.
Therefore they can't be goodfor the overall economy, because
we can't keep growing andpaying for things with our
(06:38):
credit card when we should justsay let's cut the credit card up
, let's go to some type of alimited.
Just say let's cut the creditcard up, let's go to some type
of a limited.
I like your idea making itEuropean-like, with the idea
that it's based on the overalleconomy and a percentage above
the economy.
Okay, let's say it's a ceilingof 150% of GDP and if we
(06:59):
included Social Security, it's200.
I think you have to startsomewhere, which is where I have
the biggest frustration here,because of all the things I've
heard of with closing borders,opening borders, foundries,
moving semiconductors not movingsemiconductors.
Everything we talk about isirrespective of the biggest
(07:22):
problem we face, which I believeis the deficits and the debt.
Is that?
Am I being?
Clem Miller (07:27):
too alarmist.
No, I think you're absolutelyright and let me, let me ask you
a question, Steve.
Oh is it going to be?
Steve Davenport (07:36):
hard.
Clem Miller (07:37):
No, it's going to be very easy.
No, it's actually semi-easy.
Let's say we do have a defaulton this debt, that the debt
ceiling isn't raised in time,that you have a default on part
of the debt, or let's say thatthere's a higher prospect of
default because the debt ceilinghas been reached.
(07:58):
What do you think the ratingagencies would do the credit
rating agencies and how wouldthe market respond to a
downgrade?
I mean, there was a downgrade afew years ago during one of
these episodes, but if there aremore downgrades, how do you
think interest rates wouldrespond to that?
(08:20):
On to that, as you and I know,the CFAs.
Steve Davenport (08:26):
When the uncertainty rises, the interest
rates rise.
So therefore, I would say, ifthere's a debt downgrade, then
that's saying there's lesscertainty in the US paying all
of its debts, and I would saythat would cause higher rates
and it would make the problemworse.
So therefore, I look at this asa problem that we need to face
(08:47):
sooner, not later, and I alsolook at how we think about the
debt and how we think about this.
If we were having, you know, ifwe had Miller Corp and
Davenport Corp, and we looked atour lives, what have we done in
our life?
We've gone to a point wherewe're trying to reduce debt so
that we can more easily managecash flow.
(09:10):
And I look at us and say, hey,we want to invest in these
starting industries, we want tohelp this industry in the US, to
help onshore.
All of these things are outthere that we could be doing,
but we can't because we are sohamstrung by debt.
The one thing I've heard thathas been the most frightening is
(09:31):
that I've heard, since we'vehad this incident, where all of
the Russian assets that werepart of the SWIFT system were
basically commandeered bywhatever organizations that were
part of the Ukraine alliance,and so those Russian assets that
were in the system werebasically taken over, and those
(09:53):
assets are being used now to tryto help the Ukraine rebuild.
That decision to take a systemthat had rules and regulations
and guidance and never includedthe ability to isolate one
member was really a pretty bigdecision by the US Treasury, and
what I would say the nextdecision that could come down
(10:15):
the line that will be equallyoutrageous would be.
Well, if that country is doingthings we don't like and we want
to send a message, what if wesaid that the Chinese debt
didn't deserve interest payments?
Because their behavior is soanti-US that we feel they
shouldn't be a part of thesystem, they need to be punished
(10:38):
, and the way we punish them isto not pay interest.
It would help our budgetdeficits, it would help our
overall economy, but what wouldit mean to the world in terms of
buyers of US treasuries?
If you are on the wrong side ofthe US in terms of not getting
along and not agreeing totariffs and other things, we'll
(10:59):
just stop paying the interest onyour debt.
The debt that you own of the USwill suddenly become worthless.
Not worthless meaning it has novalue, but just if you have no
interest payment and you simplyhave principal, what do you do?
Do you sell that to anothercountry?
Are they going to pay you forthat debt having an interest
(11:22):
payment, or are they going tohave to?
You're going to have to take adiscount to that so that the
other person can get it, andwhen that other person gets it,
they get an automatic increasebecause that country has a good
relationship with the US andthey can collect the interest.
So there are things that arebeing discussed and some of them
(11:43):
seem outlandish, but we have apretty outlandish situation with
our debt and I don't thinkwe're even talking about the
right picture.
We're talking about a picturethat doesn't include almost half
of the obligations that we haveas a country, so we're not
really thinking about the fullobligations.
(12:04):
We know that.
You know Social Securityincreases and all of the things
involved in Medicare.
If we don't get a hold of ourMedicare costs, that's going to
be more.
That's a bigger liabilitytrillion I should have probably
(12:27):
said 30 trillion, in which caseyou'd be more frightened and
you'd be more likely to act.
But I want to stay skeptical,and not soon.
Is that fair, colin?
Clem Miller (12:34):
Yeah, I mean, I think you've outlined a, you
know, a kind of a nightmarescenario where you have a
selective default that's theterm used where you know the US
might pay.
Well, certainly it would payits own citizens.
Steve Davenport (12:53):
I think we'd pay Japan and I think we'd pay
England and I think we'd pay.
Clem Miller (12:58):
I think we'd pay Japan, and I think we'd pay
England, and I think we'd payI'm not sure if the systems are
available.
I guess Elon Musk would know,because he invaded them right.
Steve Davenport (13:11):
When we went to SWIFT, we knew which assets
were Russian, didn't we?
When we went after?
Clem Miller (13:16):
well, because, because, uh well, the swift
system is about banks right,about bank deposits, and it
doesn't involve us.
It's a different issue, but ithas the same kind of analogy in
the sense of um, you know,you're using a global financial
system in order to, uh, in orderto reinforce sanctions, right
(13:39):
and and and.
The scenario you outline itwould be selective default on US
treasuries as a form ofsanction, and I think that it
depends on the effectiveness ofthat.
I mean, putting aside marketimpacts, but the effectiveness
of that Putting aside marketimpacts, but the effectiveness
(14:00):
of doing that requires havingknowledge as to who actually is
holding those treasuries, andI'm not sure that that
information is readily available.
Steve Davenport (14:17):
I mean, there has to be, there was a whole
group of people that were veryworried that our treasury system
was being overrun by theJapanese and the Chinese.
They were going to own so muchtreasury that we were not going
to be able to say no, and theywere going to take over the
country.
Clem Miller (14:33):
Yeah, that's kind of nonsense now.
Steve Davenport (14:37):
But in the 70s and 80s, I remember hearing it,
I remember thinking oh wow, theChinese are going to own
everything.
Clem Miller (14:44):
I mean they do hold a lot, but the vast majority,
vast majority of US treasuriesare owned by US citizens.
Steve Davenport (14:53):
Really, I thought it was close to 20 or 30
percent international no.
Clem Miller (14:57):
Let me check.
I thought it was close to 20 or30% international.
No, let me check Vast majority.
I mean 80% is is vast majority.
Okay, unless you think 90%, 95%is vast majority.
I mean we can look it up, but Ithink I think 20% sounds about
right and I think I think Japanwas the largest in that.
(15:20):
I know UK had a lot.
China, the Gulf states we can'tforget about them.
They had a number of treasuries.
China, certainly, but we don'tknow among those Chinese
holdings, we don't know thatit's the government of China or
(15:42):
Chinese banks or Chineseindividuals.
I mean there's a lot.
This would be a verycomplicated, this selective
default business would be verycomplicated to organize.
Steve Davenport (15:52):
Top foreign owners of US national debt Japan
12.7.
China 8.9.
So almost exactly 21.
So Cayman Islands andLuxembourg, which I think is
kind of interesting.
Clem Miller (16:11):
How much is in Cayman Islands and Luxembourg?
Steve Davenport (16:14):
397 billion in Cayman.
Um 397 billion in cayman.
Clem Miller (16:25):
Uh, luxembourg was um yeah, is the fourth largest
holder, um per capita 128 000these are, these would be people
who don't want the usgovernment to know, uh, who they
are right.
They're nominees, so to speak,and so we don't know who those
(16:46):
people are right.
Steve Davenport (16:50):
Right, but that doesn't mean we can't save a
few US dollars and not pay themtheir interest, does it yeah?
Clem Miller (16:53):
because I mean, you know, cayman Islands, it's a
bunch of mailboxes, right, bunchof PO boxes.
A bunch of mailboxes, right, abunch of PO boxes.
Steve Davenport (17:01):
I like mailboxes.
I have a mailbox and I likewhen it chucks in there and it's
my interest payment.
I mean, what are you going tothink against mailboxes?
Luxembourg is 425, and the UKis 765.
And they're in third place at8.9.
They're almost tied with China.
(17:21):
Yeah, china is 768.
Clem Miller (17:25):
And how much is US?
Steve Davenport (17:29):
Well, this is the top five foreign owners, so
I don't know what the overallpercentage is, but Japan had a
trillion.
I mean, I think they're good,right, we still like Japan.
So I think the big question isChina, and will China, will we,
ever resort to that type oftreatment of another country?
(17:51):
If there's, I'm going to go outon a limb here and say if
something happens with Taiwanand the US is looking for ways
to punish China for invadingTaiwan, that's it.
That's a pretty strong reaction.
But I think that's, you know, inpeople's testing of different
(18:14):
strategies and I don't think Ihave to agree with that.
Clem Miller (18:15):
Yeah, of different strategies, and I don't think I
have to agree with that.
Steve Davenport (18:17):
Yeah.
So all I'm saying here, and Ithink all we're really trying to
say, is that the debt ceilingis an indicator of a much bigger
and broader issue, which is howdo we exist among other
countries with the use of ourassets, the use of our currency?
And, if we do think about it,are there extreme situations
(18:41):
where we might make a decision.
That is, I've heard, there willbe no default.
But I also think when you starttalking about it, you're
immediately bringing up thepossibility.
I mean, I think it's out thereand I think it's being thought
about and it's being talkedabout.
I think we should think aboutit as investors, because it
(19:02):
would sure make the corporatedebt of J&J, which is still AAA,
much more valuable, wouldn't itIf you were in another country
and you owned J&J debt insteadof owning treasuries?
Clem Miller (19:16):
I think it suddenly makes gold a lot more valuable.
It suddenly makes gold a lotmore valuable, warren IRWIN.
Steve Davenport (19:20):
It makes gold a lot more valuable.
It makes a lot of things morevaluable, and that's, I guess,
what I'm trying to say.
For investors, some of thethinking that you have to go
through is what is a worst casescenario and how do I prepare
and stabilize what is our needfor income and our need for
growth, and how do we balanceboth, such that our portfolios
(19:45):
will change and will evolve, butthey will still be trying to
satisfy those two objectives?
Right, I want to havereasonable growth and I want to
have income that will allow meto live the kind of life I want
to live, and I think, once youstart disrupting the SWIFT
system and start disrupting thetreasury system, you're talking
(20:08):
about two areas that, fordecades, have been kind of
stalwarts in our economy, and Ithink that the fact that we're
even talking about it is notgood.
I don't think it's a zeroprobability, I don't think it's
100.
I don't think it's 20.
But the fact that we'rethinking about these things
(20:29):
means that we have a problem andwe need to address it, and I
think that, overall, thoughtfulpeople would say this is the way
I would run my business if Iwas the CEO or I was the
president.
Why would we want to have thistype of management with all the
(20:49):
assets in the United States, allof the things that we have at
our disposal to run ourgovernment more effectively?
To run our government moreeffectively?
It feels like we're grasping atstraws and we're doing things
that are out of sync with whatreasonable people should expect,
and I don't think that's apolitical statement.
I think that's everyone'sresponsibility, republicans and
(21:12):
Democrats, and I think the factthat we've gotten to this
situation is everybody's fault.
It isn't one, it isn't a Bidenproblem.
There's plenty of blame to goaround.
What we have here is a problemwith debt, and the solutions are
to pay the debt and hope thatwe grow faster and if we grow
(21:37):
faster than the debt grows, thenwe will pay some of it off or
we need to do something with areallocation of some of that
income to paying off debt.
And my last comment will be Ibelieve one of the things that
will come up when we talk aboutthis tax cut extension is should
(21:59):
any of the income that comesfrom the extension not being
extended?
That money wasn't planned oncoming in.
Therefore, could that money beallocated towards the debt, and
in that way, the whole countrywould not be happy that their
tax rates went up, but I wouldcertainly be more happy that
(22:19):
some of my money that was goingto the government was going to
lower the national debt.
I think that per capita it's avery large number, and I'll
probably get that to you by theend of this podcast.
What do you think, clem?
Clem Miller (22:35):
uh.
Yeah, I think I agree with youthat there has to be uh, some
attempt to reduce, uh to startpaying back or slowing some of
the growth in the debt.
I think slowing growth in debtis a more realistic objective
(22:58):
slowing it so that thepercentage of GDP, the debt as a
percentage of GDP, starts toshrink.
I think that's a logicalobjective.
I think the way to get there isby a combination of less tax
(23:18):
cut, less continuation of taxcut and or cuts in government
spending.
So I think that's got to be theway to handle that.
Steve Davenport (23:33):
As of early 2025, the national debt per
capita, that's, with $36.2trillion in the national debt
and $332 million US population,is $106,000 for every man, woman
and child in this country.
Of course, you don't pay debtwith people, right?
(24:02):
I don't know.
But I'm saying if we had to layeverybody responsible for their
own debt, um, then you know wecould all make a contribution
equal to our amount of thenational debt and I'm sure the
four or five hundred people whodid that would help reduce some
debt.
But yeah, I I think the imageryis still real, meaning, yeah,
$100,000 of debt per capita, andI look at my taxes and I say,
(24:24):
ok, how much is going to run thegovernment?
And if they took 5% of my taxesand applied it to the debt,
would I think that's a good move?
I agree.
First you have to control thegrowth, then you have to go
after actually lessening theamount of debt, and the way you
do that typically is to growyour way up.
(24:45):
I'm not sure if interest ratescontinue to rise, that growth
out of it is going to.
We're going to have to achievean exit rate of 7% or 8% for GDP
, which is not sustainable, of7% or 8% for GDP, which is not
sustainable.
So when we have a growthymarket, we're talking 4% to 5%
(25:07):
GDP.
Now we're talking 2% to 3%.
So can we double the growthrate of the economy and come up
with some solutions?
I think it's going to be hard,but we got to look at it.
I don't think that not lookingat it has really worked for us.
I don't think we've naturallyhad an affinity away from it.
I think we've had an affinityfor it.
Clem Miller (25:29):
So, steve, let me just make one last comment, and
I know we have to run, but theone way that we can one tool we
(25:56):
can use in order to help reducethe debt, that is, to reduce the
debt as a percentage of GDP.
Steve Davenport (25:57):
By increasing GDP is to encourage immigration
into the United States Correct,I agree, there's lots of like, I
think, our immigration policy.
I mean we've talked about it.
I mean we've got PhDs andmaster's students who are being
sent back to their countriesbecause we don't want to give
them any path to citizenship oran ability to work here.
Clem Miller (26:11):
But even those who are less educated, you know,
provided that they aren'tactually violent criminals,
right?
Why not encourage them to comehere and pay taxes and use their
tax revenues to help pay down?
You know, pay down the debt orslow down the growth of the debt
(26:32):
.
Why?
Steve Davenport (26:33):
not.
We could tie the two together.
I mean, I don't know what'sgoing to happen to the $5
million golden visas thatTrump's giving out.
I mean, is the $5 million goingto go to pay off the debt or is
it going to go to pay off thetariffs?
I mean, there are a lot ofsolutions here, clint, but all I
(26:54):
know is that we're talkingabout tariffs on steel and
aluminum and we're talking aboutwine tariffs of 100%, and I
think those are the wrongconversations.
Yeah, do you?
Clem Miller (27:07):
Yeah, I think tariffs is an entirely different
discussion, but I don't thinkthe tariffs are going to be—
it's a distraction.
It's a distraction, it's adistraction and and you're not
going to get the sizablepersistent level of income that
you need from tariffs, uh, tohelp resolve this debt problem.
Steve Davenport (27:32):
Right.
I don't think it's the.
I don't think it's the answer.
I don't think it's close to theanswer.
I think it's more answer.
I don't think it's close to theanswer.
I think it's more puffery.
Yeah, and I don't think thatthat has been, you know,
trademarked yet, but I'm goingto say it here.
Puffery is my description ofwhat's going on and it will be
(27:53):
continued to be in my discussionuntil we really start talking
about some of the more seriousissues in my discussion, until
we really start talking aboutsome of the more serious issues.
So, as investors, be careful outthere, because some of the main
issues still aren't being dealtwith and therefore, that's why
you hold a position in somefixed income securities or cash
to try to make it so that, if wehave a worst case scenario and
(28:15):
some of the debt weren't paidbecause of an invasion of Taiwan
or whatever the situation, wehave some cash and bonds that we
can use to buy back some ofthose assets at a better price
in the future.
Not something I want to do.
I don't want to see a 30%decline so I could buy more
stocks.
I would rather see us try to dothings to create value right
(28:36):
now and we move on from here.
But I think that what you haveto do as an investor is
sometimes you have to have aplan B, a plan C, a plan D, and
I think that all of us need tojust be a little more careful
and try to stay balanced andflexible and able to move in
different directions as the tideor the government changes.
(29:03):
Anything else to add?
Clem?
Nope, that's it All right.
Thank you everyone.
I enjoy having you as listeners.
We enjoy doing this to help youimprove your investing IQ and
we hope to have some greatguests coming up Fraser Rice and
(29:24):
Steve Petuso and we just wantto continue to give you value in
terms of ideas to help yourinvestment portfolio and your
investment IQ.
Thank you,
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