What Happens to Your Money If a Government Goes Broke? (#209) — Transcript
THE PICTURE OF WEALTH · EPISODE 209
What do you actually own when you buy an investment—and who owes you money? In this solo episode, Dustin Serviss follows government-debt headlines into a closer look at businesses, bonds and private credit, and the questions that make portfolio risk easier to understand.
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This transcript was generated from the episode audio and lightly edited for readability. It may contain transcription or speaker-attribution errors. Refer to the recording for exact wording.
Transcript
[00:00:00] Dustin Serviss: I keep hearing some version of this lately. The US has too much debt. The bond market is going to break. Governments are going broke. And normally, I hear something like that and really move on because there's always something to worry about. But then, this one got me thinking about something a little different. What do I actually own? And you're gonna catch on here in a sec what I'm talking about. And more importantly, do most of us really understand what we own? And what I'm talking about specifically is to do with our investments. Think about health care for a second. Another pivot, but Canada has a pretty incredible health care system when you consider
[00:00:36] Dustin Serviss: everything that has to do. But trying to navigate it can sometimes feel frustrating. You call one place, they tell you to call another place, you get a test, someone else interprets the test, the doctor knows the numbers, what they mean, the specialist definitely knows what they mean, but you're sitting there thinking, can somebody just explain to me what's going on in normal language? Investing can feel a lot like that. There are portfolio managers, advisors, analysts, fund companies, custodians, regulators, and investment committees. And somewhere underneath all of that is your money. According to a study in twenty twenty four, it was an investor survey.
[00:01:14] Dustin Serviss: Fifty six percent of Canadian investors were advised investors, meaning they have an advisor or a professional who manages their money. And I wonder how many of us could actually open our statement and explain what we own, not the name of the fund. I mean, what's actually inside it? Because not knowing doesn't seem particularly important when everything's going well. Then you see a headline, US debt passes forty trillion. Government bond yields are jumping. Someone on television is starting talking about debt crisis. Your phone feeds you another story about a potential bond market collapse, and suddenly, you think, should I get out of my investments or is my retirement money
[00:01:54] Dustin Serviss: safe? What happens to my investments if the actual government can't pay its debts? Those are all reasonable questions, but here's what I've been wondering. What if the headline isn't actually connected to your investments in the way you think it is? Let's simplify investing right now. Forget all the industry language for a minute. If you want to invest money, there are two really basic things you can do with it. You can own something, or you can lend some money to someone. A stock means you own a tiny piece of a business. A bond basically means you've lent somebody money. They agree to pay you interest, and assuming everything goes according to plan, they
[00:02:31] Dustin Serviss: give your money back at the end. So who can you lend your money to? A government, a public company, a bank, a private company, lots of different borrowers. And this is where I ended up down a rabbit hole. Imagine you're thirty years old. You sit down with an investment person. They ask you, what's your risk tolerance? You say, well, I'm aggressive. Fine. You have decades ahead of you. You might own mostly businesses through stocks and accept some pretty large swings along the way. Now let's assume you're fifty five. Maybe you've built a successful business. Maybe you're thinking about selling it. Maybe you have enough money that getting the highest possible return
[00:03:10] Dustin Serviss: isn't actually the objective anymore. You want some growth, but you also want stability. Traditionally, this is where some version of a balanced portfolio enters the conversation. Stocks on one side, bonds on the other. The stocks are supposed to provide the growth. The bonds are supposed to provide some stability. Nothing particularly controversial there. Except, I started thinking about those government debt headlines again. If I'm genuinely worried that governments have borrowed too much money, why would lending money to governments automatically be the safest part of my portfolio? Now we're getting somewhere. Suppose I have two choices. I can lend money to a government, or I can lend money to an
[00:03:53] Dustin Serviss: exceptionally profitable company. Now this isn't a buyer or sell recommendation, but I wanna put an example company to the equation that everybody knows. Let's assume Microsoft for now simply because you know it and most people know it. Now imagine the extreme scenario. The government gets itself into such financial difficulty that it defaults on some of its debt. Does Microsoft disappear? Do people stop using Excel or Office or Word? Do people that use Microsoft stop paying Microsoft? Do its operations in Canada, Germany, and Australia suddenly cease? And that's when I found something I wasn't expecting. Credit rating agencies already account for this.
[00:04:33] Dustin Serviss: There is one called S and P. They have a methodology for the situation when a company can actually be a rated above a government of the country where it operates. Why? Because under certain circumstances, the S and P rating agency believes that company could continue servicing its debt even if the sovereign government defaulted. Think about that for a second. The government stops paying some of its lenders. The businesses keep paying its lenders. That doesn't mean a government default is harmless. Banks could get hit. Credit could type. The currency could fall. Taxes could rise. Who knows? Consumers could pull back. Companies could fail. A government debt crisis can spread throughout an economy.
[00:05:18] Dustin Serviss: Everything is interconnected, but interconnected isn't the same thing as identical. A profitable global business can have customers in dozens of countries. It can hold assets outside its home country. Its revenue might come from all over the world. A boring private manufacturer might own valuable equipment, generate substantial cash flow, have low debt, and sell essential products to customers across North America. Those businesses have their own balance sheet, their own assets, their own cash flow, their own debts. And suddenly, the question isn't government bond or corporate bond. The better question becomes, who exactly am I lending to? And this leads into something else happening in investments right now.
[00:06:01] Dustin Serviss: Private credit has become enormous. Private credit simply means lending money to businesses outside the traditional publicly traded bond market. Now Preco says private credit data now covers about one point eight trillion of invested capital. That's no joke. And institutional portfolios have been increasing their allocations to private markets. Who's an institutional portfolio? Big money. So that's interesting to me. Not because private credit is automatically better. It isn't. A private company can still absolutely fail, but private loans can also be difficult to sell. Valuations aren't updated every second like stocks and bonds. The manager selecting the loans matters enormously.
[00:06:44] Dustin Serviss: And we still haven't seen today's massive private credit industry experience every possible economic environment. So this isn't government bonds bad private credit good. That's far too simple. The interesting idea is maybe we should stop using the word safe without asking what makes something safe. If I'm lending money, I wanna know who is the borrower, how much debt do they already have, how much cash do they generate, What asset sits behind my loan? And am I first in line if something goes wrong? What happens if interest rates go up, go down? What is that risk? Can I get my money out if I need? And what would actually happen if this borrower stopped paying me?
[00:07:27] Dustin Serviss: Those questions apply whether the borrower was Microsoft, a private manufacturing company, or a government, which brings me back to those scary headlines. Government debt is rising. Bond markets are volatile. Those are legitimate things to understand. But every headline saying government bonds are in trouble doesn't automatically mean everything I own is in trouble. And ironically, if you don't understand what you own, you're probably more vulnerable to that headline. Not necessarily financially, emotionally. You don't know whether the story affects two percent of your portfolio, forty percent, or almost none of it. So the headline fills in the blanks, and fear loves
[00:08:07] Dustin Serviss: blanks. Maybe one of the most valuable things you can do with your investment person isn't ask, how did I do last quarter implying performance. Ask them, show me what I actually own. Not the fun names, Show me underneath the fun name. What businesses do I own? Who am I lending money to? Why do I own government bonds? Why do I own corporate bonds? What is each part supposed to do when things go badly? If they can explain that to you in plain English, you probably understand your money considerably better. Or could there be a situation where lending to an extraordinarily durable business with real cash flow, real assets, and sensible debt actually
[00:08:49] Dustin Serviss: deliver better credit? I don't know. There's no one universal answer, but I did discover something important while researching for this episode. A government can default without every business underneath it disappearing. The economy doesn't necessarily stop. People still buy things. Companies still produce things. Employees still go to work. Some businesses do fail. Others adapt, and some continue making a lot of money, which makes me think that maybe the important question isn't whether your portfolio is conservative, balanced, aggressive. May it's much simpler. Do you actually know what you own and why you own it?