Increasing US Debt And Its Impact On Investing

In previous articles, we focused a lot on the financial considerations of those who were attending or thinking about attending law school.  Frankly, that's gotten old.  It's time now to shift focus for a time to other financial considerations that may face an attorney later in their career.  In this acticle, we are going to take a look at how the increasing US debt may impact investment returns in the future.  Some specific recommendations that may lead to a higher return are presented after the jump.
In this article, we note that the US debt has already risen past the limit established in the spring and is up about 20% in the last two years.  Here are the two most important things in this article:

1. The latest posting by Treasury shows the National Debt at nearly $12.135 trillion.
2. The White House projects a record $1.5 trillion dollars deficit this year alone, and a 5-year deficit total of $4.97 trillion.
   

Here are some facts that are not in the article that help us put this in context:

1. The American economy is contracting and is expected to continue to contract in the near term.  Consequently, even if the debt remained constant, the debt would represent a greater share of the economy.
2. How we have been solving the problem is by increasing the money supply.  This lowers the value of the dollar and maintains the debt-to-GDP ratio even in light of a falling GDP.  The US has a huge advantage over other countries because our debt is denominated in dollars - and we can change how much a dollar is worth by increasing or decreasing the money supply.
3. Most other countries have their debt also demonimated in dollars - instead of their local currency.  This means that they don't have the opportunity to debase the currency of their debt.  However, they like it when the value of the dollar goes down. At least DEBTOR countries like it - lender countries see their investments dwindle, like China's purchase of US securities.  However, debtor countries vastly outnumber lender countries at this time, so there is unlikely to eb overwhelming pressure to change.
   

OK, so here is what the financial impact will be:

1. The US Dollar will continue to decrease in value.  Consequently, if the demand for a commodity remains level, then that commodity will appreciate against the dollar.  Similarly, if a foreign country is debasing their currency less than the dollar, (or not debasing their currency) then that currency will rise against the dollar.
2. Most of the SP500 include assets that are demonimated in foreign currency or are located in foreign countries. They also obtain revenue in foreign countries - about 36% of their total revenue.  Revenue obtained in foreign countries will now be worth more in the US, which means that these companies will report increased earnings in dollar terms.  Unfortunately, most small caps will not see this advantage because they typically only get revenue in the US.

Ways to play it -

1. You could always trade currencies, but most people don’t like to do so.  
2. You could own foreign bonds demonimated in an increasing or stable currency (Chinese yuan or Swiss Franc).  In this situation, you get the currency bump plus the interest payment.  
3. You could also buy foreign companies.  With regard to buying foreign companies, recognize that it is harder to get capital 1) outside the US, and 2) when the company is smaller - and that capital is still fairly hard to come by now.  Consequently, look for large companies that are fairly valued and throw off a lot of cash and are denominated in a foreign currency.
4. If you want to stay in the US, you might want to trade in your small caps for the SP500
   

As always, I would be interested in any comments or feedback!