There is a lot of hype about the national debt of the USA being incredibly large, and I wonder if this has any implications about an individual investor? I understand that the risk of having a large national debt is that the government may be unable to pay for its bonds. But if an investor holds only stocks of private companies, does he have any reason to worry about this? If so, what can an investor do to protect against this?
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asked Dec 31, 2014 at 7:34
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$\begingroup$ This question seems to me to be way off topic. If a government fails to meet its debts, we can speculate forever about the political consequences and how those consequences might affect various subsectors of the economy (presumably some positively and others negatively). There is perhaps a good question to be asked about how all this plays out in some specific political-economy model, but the question currently seems to ask what could happen in some model, and the answer, of course, is anything. $\endgroup$– Steven LandsburgCommented Dec 31, 2014 at 17:42
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3$\begingroup$ Well - if you take it literally, the question is do I as a private investor need to worry about the financial collapse of my national government? I believe economic history is fairly clear on that one. $\endgroup$– LumiCommented Dec 31, 2014 at 19:15
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1 Answer
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Sure, government borrowing affects the small investor in many ways.
For starters, there is only so much money available for borrowing. The more the government borrows, the less there is available for everyone else. This pushes up interest rates and in some cases will make it impossible for the least desirable borrowers to get a loan at all.
If the government defaults on its loans, this would cause many problems. Details are debated by economists, but I don't know anyone who says it would be good for the economy.
As to what you can do personally to protect yourself ...
Of course there are political things you can do, like voting for and otherwise supporting candidates who campaign on economic policies that you believe are more desirable.
If you are worried about the government defaulting on its bonds, then don't buy government bonds.
If you are worried about the macro-economic effects of a government default, you could invest money in foreign countries that you believe have wiser debt policies.
Invest in companies that are more likely to survive or prosper in an economic downturn. Like, if there's a depression, people will still need food, so food-processing companies are probably relatively safe investments. If people are suddenly made poor, they're probably not going to buy frilly luxuries like video games, so those might be poor investments. But the rich tend to manage to get along no matter how bad things get, so services for the rich, like luxury yachts, might do well regardless. There are plenty of people out there who do research on this sort of thing that you could consult.
People who are deeply worried about government default often advise people to invest in commodities, especially gold. If the government goes bankrupt and takes large sections of the economy down with it, precious metals, especially gold, tend to hold their value.
If you're really worried you can build a compound in the wilderness, stock it with food and other supplies, and have an arsenal of guns to protect you from the marauding hordes after the economic collapse. :-) (Okay, I say that flippantly, but if you're convinced that things are going to get very bad, that would be a logical thing to do.)
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$\begingroup$ Thanks, this seems like a good answer. I don't understand the down-votes. $\endgroup$ Commented Jan 4, 2015 at 8:56
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$\begingroup$ Yeah, I wish when people downvoted they would give a comment saying why. Do they think the answer is unresponsive to the question? That important facts are incorrect? That it is unclearly worded? Etc. Oh well, I'm not going to agonize over it. $\endgroup$– JayCommented Jan 5, 2015 at 14:25