Market report

Systematic decision-making errors, election campaign topic: US national debt.

April 3, 2024
5 Min
Systematic decision-making errors, election campaign topic: US national debt.

Chart of the week

Quelle: X, The Kobeissi Letter, @KobeissiLetter, 30.03.2024

The chart shows the change in house prices for newly built houses in the USA. In red, the development during the financial market crisis, which originated in the housing market, and in blue, the development in 2023 and 2024.

Why this is important

The crisis on the real estate market continues. The crisis is now comparable to the financial market crisis in the USA from 2008 to 2010. The financial markets have digested the downturn quite well so far. The crisis has not yet spread to other areas. This is probably due to the low level of unemployment.
There is a well-known stock market rule: "Never catch a falling knife". You shouldn't try to catch a falling knife in flight. It is better to wait until it is on the ground and then pick it up safely. You should therefore wait to invest in the US housing market until the downward momentum has slowed and prices have bottomed out.

Systematic decision-making errors

Last week, Nobel Prize-winning economist Daniel Kahneman passed away. His main field of research was the psychology of judgment and decision-making.

For a long time, economists assumed that all market participants acted exclusively rationally. Daniel Kahneman showed that this was not the case.

He wrote many books on this subject, which are very instructive for investors. Here is a list of the systematic decision-making errors that many investors make.

  • Loss aversion: People tend to fear losses more than they value gains. For example, investors may hold stocks longer to avoid realizing a loss, even if it would be rational to sell to limit potential further losses.
  • Confirmation bias: This occurs when people prefer information that confirms their existing beliefs or hypotheses and tend to ignore information that contradicts them. For example, people who believe that certain supplements have health benefits may ignore studies that show the opposite.
  • Overoptimism: People tend to overestimate the likelihood of positive events and underestimate the likelihood of negative events. For example, entrepreneurs may tend to be overly optimistic about the chances of success of their new business and neglect potential risks.
  • Hindsight bias: People tend to view past events as predictable or inevitable after they have already occurred. This can lead to an overestimation of one's own ability to predict events. For example, after a stock market crash, investors may believe that they were able to predict the downward movement, although this is often not the case.
  • Groupthink: In group decision-making, the desire for consensus and harmony can lead members to withhold their own concerns or dissenting opinions in order to maintain group membership. This can lead to poor decisions as important information or alternative perspectives are not taken into account.

Quelle: ChatGPT, 29.03.2024

It is worth reading this list regularly and asking yourself if and when you have already made this mistake. Shouldn't I sell the share in my portfolio that is making a loss? Is the share in the portfolio that is making a profit really that good or am I just telling myself that?

A slightly more complicated example is the reversal of cause and effect.

A 19th century English reformer noted that farmers who were moderate and industrious in everything owned at least one or two cows. Those who had none were usually lazy and addicted to drink.
He therefore suggested that all those farmers who did not yet have a cow should be given one in order to make them moderate and industrious in everything." (Source: Risk in Management, Christian Glaser, page 326).

In the above example, the fallacy is very obvious. The next example is a little more difficult.

US national debt

Migration and the national debt in the USA are likely to be the main issues in the US election campaign.

The development of national debt in the USA is indeed worrying:

Quelle: Zürcher Kantonalbank, 23.11.2023

The chart shows the level of national debt in the USA. Major crises have generally led to a sharp increase in debt. This was also the case after the pandemic.
As in previous cases, however, debt (shown here in relation to gross domestic product) is not falling. The estimates do not come from some doomsayer, but from the COB.
The Congressional Budget Office (CBO) was founded in 1974. It is a bipartisan congressional body that calculates the additional debt based on newly planned legislation. The figures are accepted by both Democrats and Republicans.

Quelle: Isabelnet, 20.03.2024

Based on COB estimates, the US national debt will double from 20 trillion to 40 trillion between 2017 and 2025.

As a special feature, the USA has a debt ceiling that is set by parliament. If this is reached, the parties must agree on an increase, otherwise the USA would face national bankruptcy as the interest on previous debts could no longer be paid.
In 2023, the parties have agreed to suspend the ceiling for two years. In other words, until after the elections. In return, the Democrats had to severely restrict spending.

Quelle:, 21.3.2024

By a private individual, debt is measured in relation to annual income. For countries, the annual income corresponds to the gross domestic product (GDP). This is shown in the chart above.
This raises the question of which value is too high. This is not so easy to answer. Japan has had debt of over 200% of GDP for years and yet it has survived well. Greece, on the other hand, with a figure of 170%, had to declare state bankruptcy.
The optimists (especially the Democrats) argue that a national bankruptcy of the USA is not possible with the USD as the world currency or will take a very long time, if at all. The pessimists (especially the hard core around Trump) argue that the US is on the verge of bankruptcy.

It is not only the amount of debt that is important, but also which investors hold the debt and what price (i.e. interest rate) they want for it.

Quelle:, 21.3.2024

The chart shows which countries enable government debt in the USA. The three largest holders of US government securities are Japan, China and the UK. All three countries have reduced their holdings in recent years as they have had many local problems to solve.

As we have seen above, the supply of US government bonds is rising sharply, but demand is tending to fall. This is never a good sign for markets. In the current case, this means that the US tends to have to pay more interest so that investors are willing to finance the large US deficit.
However, the largest holder of US government bonds is missing from the chart above. This creditor currently owns around 50% of all US government bonds. This creditor is the US Federal Reserve! The government largely finances itself and prints money to finance its deficit.

Another important point is the level of interest rates. Key interest rates in Japan have been at 0-1% for over 20 years. This is a good way to manage a high national debt.
The USA currently pays an average interest rate of 3% on all outstanding government bonds. All bonds that expire and all new bonds must be issued at an interest rate of 5%. This leads to a sharp increase in interest payments.

Quelle: X, Michael A. Arouet, @MichaelAArouet, 30.03.2024

The chart shows the development of interest payments by the US government. Due to the sharp rise in interest rates, these have also exploded. The USA currently needs 10% of all tax revenue to pay interest. If interest rates remain stable, this figure will continue to rise rapidly, reducing the government's scope to finance government programs (including the military).
The chart shows in yellow how the interest burden would develop if the US Federal Reserve were to cut interest rates in June.

The question that arises is how independent the central bank can still be. If it does not raise interest rates, it risks a crisis in US government bonds, 50% of which it owns.

So far, none of this is a major issue. The prevailing view is that the US cannot go bankrupt with the USD as the global currency. However, the issue has also been hushed up so far. In the election campaign, the issue is now at the top of the list.
The direct impact could be a lower USD. But where should the money flow to? To the EUR, a continent at war, or to China, which is currently not emerging from the real estate crisis and has a totalitarian government that cannot be assessed? The USA could be lucky that all the alternatives look even weaker.

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