How does the national debt impact investments?

Answer 1

National debt, well, for substantial countries like the US, is often a good refuge for money when the economy stinks. If business is generally bad, then people more interested in wealth preservation will bid up government debt because the other investments are perceived to be too risky.

Remember, market capitalization is a pretty bogus store of value (multipy a company's outstanding shares by the most recent price of the shares on a public exchange). A market crash, supposedly, erases enormous amounts of "value". The government bonds, meanwhile, have two values: a similar market value, and the face value. If held to maturity, the investor knows how much he will get (plus interest for the intervening period, assume they aren't those stripped of coupons or are notes, wherein the price discount to the face determines the "yield"). The stocks have per share equity (book value) numbers, but that is if the company is liquidated--which almost never happens and when it does the value is often virtually nothing.

A large national debt means there is room for many to buy-in to the debt when abandoning the stock market. But then, a large national debt means that there needs to be a heavier tax burden to pay for it (or at least a maintenance service of it). Heavy tax burdens can have a dampening effect on the economy and a depressing effect on stocks.

Answer 2

There's only so much money out there to borrow. The national debt consumes a chunk of it, thereby reducing the supply for the rest of the country to borrow. It drives up interest rates.

Yes, kids, that home mortgage you want at 6% would probably be at 3.5% if there were no national debt. It's like you're paying interest on someone else's loan.

Answer 3

Yes, when interest rates go up, stocks are put under pressure and are more likely to go down.




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