$40 trillion.

That's where the U.S. federal debt officially landed a few weeks ago.

It's a number too large to picture, which is exactly what makes it feel alarming.

So should you be alarmed?

The honest answer: nobody knows where the line is, but people have predicted this catastrophe since the 1940s.

In today's email:

• What the $40 trillion headline leaves out
• Why the doomsday predictions keep failing (and what would actually worry me)
• Why none of this should change how we invest

As always, I'll wrap up with a few of the best retirement and investing articles I read in the past week.

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Before we dive in, did you catch this week's podcast? 👇

The $40 Trillion Headline Isn't the Full Story

The federal government’s total debt has crossed $40 trillion, but roughly $7.75 trillion of that is money one part of the government owes another.

Think of it as your left pocket owing your right pocket.

Strip it out, and debt held by the public is $32.3 trillion.

That’s still an enormous number, but size alone doesn’t tell us much without context.

The U.S. has nearly $450 trillion in financial assets, which means federal debt held by the public represents roughly 9% of that total. (If you include non-financial assets you’re getting close to $600 trillion.)

As Cullen Roche recently pointed out, that ratio is near the upper end of its historical range, but it’s not dramatically different from where it has spent much of the past 15 years.

In other words, the debt is enormous partly because the U.S. economy and financial system are enormous, too.

We've Heard This Warning Before

In the 1940s, Warren Buffett's father (then a congressman) warned that America was borrowing its way toward Weimar-style hyperinflation.

In 1972, Time magazine put the debt on its cover, at roughly $430 billion.

In 2009, just after it crossed $10 trillion, one prominent voice called it "a financial catastrophe of inordinate proportions."

Another declared "America's long-awaited fiscal train wreck is now underway."

You know how the years since went... near-nonstop growth in the economy, the stock market, and household wealth.

80 years of false alarms doesn't make the worriers wrong forever, but it should raise the bar for the next scary headline.

Why the Doomsday Math Keeps Failing

Two mistakes show up in almost every debt-crisis prediction.

Mistake #1: Treating government debt like a mortgage. A mortgage has a payoff date. The federal debt doesn't. It gets refinanced, not repaid, and as long as the economy grows, it tends to grow too.

Mistake #2: Forgetting the other side of the ledger. Every dollar the government owes is a dollar someone else owns. Treasuries sit inside pension funds, insurers, banks, and retirement portfolios (very likely yours). It's the largest, most liquid bond market on earth, with no substitute.

As Morgan Housel recently showed, government plus household debt, as a share of the economy, is roughly unchanged from 20 years ago.

Washington borrowed more; American families borrowed less.

Would you trade a spotless government balance sheet for the household mess of 2007? 🤔

What Would Actually Worry Me

Three are three things that worry me more than the headline number:

1. Inflation that stays elevated
2. Interest rates that keep climbing
3. Interest costs crowding out everything else. (Interest expense already exceeds the defense budget.)

Today, inflation and bond yields both sit near their long-term averages.

The risk I watch most closely for retirees is political: Washington eventually using the debt as the excuse to change Social Security or Medicare for people who planned around them. That's a planning risk, not a portfolio risk.

There's a check on all of it, though. As Stanley Druckenmiller put it recently:

Right now, it isn't flashing red, which matters more than the headlines.

The catch: Washington has started trying to manage that price through bond buybacks. All the more reason to watch it, not the headlines.

Why This Doesn't Change How We Invest

We invest in great companies around the world, not the U.S. government.

Companies can't print money, so capital has to be rational. When great businesses borrow, it's typically to grow earnings—something they've done reliably for decades.

That's why so many of you have a higher net worth today than ever before.

The real risk is the urge to "do something" about it, such as abandoning a sound portfolio and retirement plan built over 30 years because of a headline.

Bottom Line

The federal debt is a legitimate long-term risk. It has also been "about to trigger a catastrophe" for 80 years.

Most of your capital isn't invested in a balance sheet in Washington; it's invested in real businesses solving real problems for real people, all over the world.

That's the perspective worth holding onto the next time a scary debt headline crosses your feed.
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📚 What I've Been Reading

• 4 Reasons to Think US Inflation Will Come Back Down (Morningstar)
• Will Rates Fall When the Fed Raises Rates? (JC Parets)
• Here’s How Much Americans Rely on Social Security – at All Income Levels (Center for Retirement Research)
• Why Chasing Peak Optimization in Your Health & Finances Is Actually Hurting You (The Purpose Code)
• The Message of Mr. Rogers (Lion's Roar)
• Play Helps Make Us Human (Aeon)

Thank you for reading!

Please reply to this email with comments, questions, and/or feedback.

Stay wealthy,

Taylor Schulte, CFP®