Think the national debt won’t impact your business? Think again. As James Kwak, co-author (with Simon Johnson) of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You, revealed to me in a recent interview, “It’s quite plausible [the national debt] will start having serious economic effects within the next 5-10 years.” The government’s mix of high spending and deep tax cuts risks one of two negative consequences. The first, says Kwak, is that “over time, if the national debt stays high, investors will lose confidence in the federal government and interest rates will go up, which affects everybody because it makes it harder to do things like borrow money to build factories. Or the other possibility is the Federal Reserve might start creating a lot of money in order to fund the national debt and that could cause inflation.” Either outcome is bad for the economy – and your business.
Kwak finds it unlikely that China (which owns a large portion of America’s debt) would suddenly stop buying bonds or sell them off – after all, we’re now China’s version of “too big to fail,” since so many of their assets are tied up in American dollars. A rapid, Greek-style meltdown is also unlikely to happen – largely because we control our own currency (unlike the Greeks, who are part of the Eurozone) and we could instead “engineer some kind of a gradual outcome.” But – unless America embraces fiscal responsibility - the most probable scenario still isn’t a pleasant one. “Productivity will go down a little, the economy will grow more slowly, and there’ll be more inequality because there are fewer government services to help people,” says Kwak. “It’s the long-term decline of the U.S., which is not a happy story.”
What can be done? “The best solution is the country as a whole - the political class - could come up with a solution,” says Kwak. But given recent American political history, that’s a tall order. (Deficits, except for a brief break in the ’90s boom years, have been raging since the Reagan era – check out David Stockman’s The Triumph of Politics for an inside account.) Kwak – who believes America’s crumbling infrastructure and “mediocre” education system is harming our businesses – supports more domestic funding and fewer tax cuts. “Having a government that doesn’t even provide this basic level of public services is going to make American business less productive overall, and it’ll be harder to compete,” he says.
But if a political solution remains out of reach, Kwak suggests two moves to protect your own financial interests. First, diversity your investment portfolio: “You’ll want to diversify overseas and within the U.S., and invest more in stocks than in government bonds” because inflation will erode the value of bonds. Second, if your company isn’t already serving an overseas market, start investigating the possibility now. That’s because Americans’ purchasing power is likely to erode in the future, so you’ll want to be ready for international buyers to pick up the slack.
The national debt isn’t a sexy topic; it can seem both impossibly large and incredibly far-off in the future. But unless the political establishment makes it a priority, it’s likely to start affecting you and your business within the next few years. It’s time to start talking to your legislators - or at least diversifying your financial future to prepare for the worst.
How do you think the national debt will affect your business? What are you doing about it?
Dorie Clark is CEO of Clark Strategic Communications and the author of the forthcoming Reinventing You: Define Your Brand, Imagine Your Future (Harvard Business Review Press). She is a strategy consultant who has worked with clients including Google, Yale University, and the Ford Foundation. Listen to her podcasts or follow her on Twitter.