My View: The federal debt isn't as bad as you think

After reading George Rauch’s recent Market Watch column, I am reminded of “Plato’s Cave.” It says we’re all bound in darkness watching shadows made by politicians, advertisers and others. We believe the shadows are reality.

I didn’t appreciate Plato’s wisdom until I began counseling investors 30 years ago.

In 1992, the Dow was around 3,000. The cover of The Economist caricatured America as “Sam, Sam, The Paranoid Man.” Even the book-of-the-year in conservative Christianity was about the evils of the federal debt. Bill Clinton became the leader of the free world by exploiting our illusions about “the economy, stupid.”

Yet the same year, Robert Bartley, editor emeritus of The Wall Street Journal, was writing in his new book, “The Seven Fat Years,” that the federal debt was “grossly overrated” and “a great national myth.”

My mentor, Sir John Templeton, the “dean of global investing” who was a Rhodes scholar in economics, was predicting the stock market would soar because the modest federal debt would not even slow economic growth.

Today, the debt has been politicized again. The Economist has just featured “Angry America.” A Forbes.com article entitled, “The Misinformed Tea Party Movement,” shows many voters still haven’t glimpsed economic reality. Those surveyed estimated federal taxes consume three times the GDP they actually do. Most said they’ve been rising, though they have been falling to the lowest percentage of GDP since World War II.

Most think America has gone “socialist.” Yet the Sept. 15 edition of The Wall Street Journal said Americans receive 9.4% of their after-tax incomes from government, the lowest of any developed nation and one-third of truly socialist countries such as France and Sweden.

Despite doom-and-gloomers who cast the most frightening shadows during a recession — and this one was probably lighter than the one of the early 1980s when inflation was in double digits — the Dow has recently surpassed 11,000, out-performing Glenn Beck’s gold coins since the bottom. So, a little reality might be enriching, especially because Templeton also predicted the Dow might rise to 1 million this century.

Unfortunately, Plato also said cave dwellers and, particularly, shadow makers, must kill anyone who attempts to bring light into the cave because they are quite happy with the shadows. So, let me duck as I share a few facts about the debt Alexander Hamilton said would be a “blessing,” as it has been as it has soared during every war from the Revolutionary to Iraq.

Everyone has read the federal debt is approaching $14 trillion. I’ve never found one American who has seen the size of our assets. But, according to the latest federal budget from the Office of Management & Budget in the White House, America’s assets are now $125 trillion and have been growing even faster than the debt. So America’s debt-to-asset ratio had actually fallen from 10.3% when Reagan took office to 6.5% in 2008.

Deep within George W. Bush’s last budget was this confession: “The size of our net foreign debt is relatively small compared with the total stock of U.S. assets.” Yes, the debt has soared by $3 trillion since 2008. But the stock market alone has soared $4 trillion since the bottom. Further, statistics about debt do not consider what we own abroad. Professor Jeremy Siegel, of Wharton, has calculated: “Every dollar of international indebtedness is matched by a dollar of assets abroad.”

Compared to our income, our federal debt is approaching 100% of GDP. But it was 128% at the end of World War II, and we entered the war late. Great Britain’s was 240% at the end. And most of us assume the federal debt is owed entirely to foreigners.

The reality is that Americans own one-half of the debt in the form of T-bills, notes and bonds, often through mutual funds. That’s as threatening as owing half your mortgage to your spouse’s trust fund. So the CIA actually keeps tabs on how much debt each nation owes to foreigners. In 2009, it said ours was 52.9% of GDP, ranking us 47th in seriousness around the world. The average nation owes 56%. And what businessperson wouldn’t borrow for 10 years at 2%, as our government can?

It’s a shame more investors haven’t seen those realities. Largely due to political illusions, individual Americans are only now beginning to buy stocks, which were far cheaper before the recent election campaigns began. Many failed to buy higher-paying bonds before they rallied despite the shadow makers predicting stimulus would result in inflation.

The final and future shame? Many will now be optimistic and invest in fully valued securities because voters have simply fired a few shadow makers. Yet our even more divided government may again turn our fears of growing poorer into reality, as leaders have done since the fears of the Hebrew spies caused them to paint the promised land of milk and honey as a land of unconquerable giants.

The Nov. 6 post-election issue of The Economist quipped: “The leaders of the tea-party movement claim the mantle of Ronald Reagan but they lack both the Gipper’s sunny optimism and his pragmatism.” Most of our new house divided still wants government to provide guns and/or butter; but half won’t tax or borrow to pay for them. That virtually guarantees massive deficits the Fed must fund.

Gary Moore is a Sarasota-based investment adviser who has served on the board of advisers to Jack Kemp. Moore has authored five books on the morality of political-economy.