The Wall Street Waltz: 90 Visual Perspectives, Illustrated Lessons From Financial Cycles and Trends, Revised and Updated Edition

APPENDIX A: MYTHS TO FRIGHTEN CHILDREN

When the market fluctuates 100 points a day or more, as it has lately, people begin to panic. But don't let mass hysteria throw you off course from a sound long-term investment program. The most severe and real problem for most investors should be finding stocks with real value—particularly so in a market that is up 130 percent in four years. Stick to unpopular stocks of good companies.

But—some people say—isn't the federal deficit so bad that it threatens the entire economy, unpopular stocks included? Not so. While you read lots of media hype about the deficit, and politicians babble about it to no end, the deficit/federal debt hysteria is just one of many scarecrows needlessly frightening folks from sound investment policies.

The crucial issue isn't the deficit's size or total federal debt, but our ability to service that debt. The fact is, total federal debt is a smaller percentage of GNP than it was in mid-1960s, and lots lower than the 1950s. Public debt as a percentage of GNP reached a peak of about 120 percent during World War II. For the next 30 years we shrank that ratio. Even in years when we ran budget deficits, debt shrank relative to GNP because real growth and inflation raised the ratio's denominator more than the deficits raised its numerator. Inflation was a big force, boosting our repayment power by lowering the debt's value.

By 1955 the 120 percent had dropped to 58 percent. By 1965 it was 42 percent, and by 1975 it reached ...