Large Fiscal Deficits Are Not the Real Problem
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"For me context is the key - from that comes the understanding of everything." – Abstract Artist Kenneth Noland. That holds true for me as well! Proper context is required to know if market narratives accurately describe the truth.
For example, in Moody's recent decision to put the United States government on credit watch negative, the context driving its decision was not necessarily run-away deficit spending, as most investors believe. It made its decision within the context of high interest rates:
In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody's expects that the US' fiscal deficits will remain very large, significantly weakening debt affordability.
Make no mistake, large fiscal deficits and accompanying Treasury debt issuance are a problem. But the downgrade was directly attributable to the level of interest rates. The concern will vanish quickly, regardless of debt-issuance patterns, if interest rates fall appreciably.
At zero-percent interest rates, Uncle Sam, or for that matter you and I, can borrow trillions upon trillions of dollars and not have to worry about making good on the interest payments.
Let's provide context and facts to assess better if the latest bond market bear narrative claiming that higher yields are a direct function of massive Treasury debt issuance is logically defensible.