I was reading this week about our country’s “twin deficit” in Foord’s quarterly newsletter they send out to us. Simply put, a twin deficit is when a country’s imports exceed its exports (so it buys more than it sells) and when the same country spends more than it collects from taxes (so it spends more than it earns). If we spend more than we earn we will soon find ourselves in difficulty too.
I was reflecting on this situation not being very good for South Africa right now, meaning we have a twin deficit. However, the listed companies that you are invested in through decent asset managers are not affected by this situation in the same way. They continue to make income and profits and declare dividends because they are, in a way, economies within themselves. If a consumer doesn’t really have the money to shop, then they (usually) shop with a credit card. (A retailer can get in trouble if they allow too many people to shop on account and then the accounts are not paid). So the retailer gets its money straight away and the consumer owes the bank – via the credit card. If the consumer cannot pay for what they just bought, it is now the bank’s problem, not the shop’s problem.
One of the reasons why I rather owe a bank money than be owed money by a bank. There might be a couple of holes in my simplistic thinking but by and large, our investments are not seriously affected by a governments spending problems. I also believe our money is safer in good listed investments than in a bank.