Should Investors Worry About the Growing Deficit?

November 15, 2019 | Brandon Von Feldt, CFA, Research Analyst

Americans have seen tax cuts and strong historical returns across asset classes since the Global Financial Crisis. However, though the general populace has been flourishing, the decrease in revenue flowing to the government and an increase in defense spending have contributed to the deficit increasing each year since 2016. Is the increased deficit a systemic risk or simply a side effect of a low rate environment?

This week’s chart of the week shows the United States’ deficit since 2007 in absolute terms as well as a percentage of GDP. The deficit spiked during the financial crisis at $1.4 trillion dollars as the administration took action to provide stimulus to the nation while in a recession. Shortly after, the deficit began decreasing as the economy moved towards recovery. More recently, the deficit has been increasing and is projected to reach $1.1 trillion dollars in 2020, an amount not seen since 2012. On an absolute basis, the deficit has been moving upward, but has this been offset by an increase in GDP? The blue line on the graph shows the deficit as a percentage of GDP. This metric has also been steadily increasing since 2016, though it is still much lower than during the Great Recession.

One area of potential concern is that during past expansions the deficit was decreasing or low, while now the deficit is moving in the opposite direction. If a recession were to occur, the government would have to borrow even more to stimulate the economy, pushing the debt level even higher and possibly raising concerns about the U.S. financial system. On the other hand, a theory of economic thought called Modern Monetary Theory (“MMT”) has gained traction due to the proposal of large increases in government spending by left-wing presidential candidates. MMT states that a country that prints its own currency does not have to worry much about debt as it can pay it off simply by adding to the monetary supply. Thus, the thought is that the only target for central banks should be inflation.

In all, deficit spending is a crucial means of financing public programs and stimulating the economy, no matter which economic viewpoint is applied. The U.S. deficit has ebbed and flowed over time and will continue to be a point of political contention for years to come.

Print PDF > Should Investors Worry About the Growing Deficit?

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Brandon Von Feldt, CFA
Research Analyst

Get to Know Brandon

Related Content

Column chart showing survey results by percentage of respondents. Chart subtitle: Market professionals respond: "How much do you agree or disagree with the following statement? Currently, there are many bubbles in financial markets." Chart description: Y-axis shows % of respondents ranging from 0-60%. X-axis shows columns by "Strongly agree, Slightly agree, Neither agree or disagree, Slightly disagree, and Strongly disagree." 37% strongly agree, 52% slightly agree, 5% neither, 6% slightly disagree, and 1% strongly disagree. Chart source: dbDIG Survey, Deutsche Bank Research. Data was released this week.


Bubble, Bubble, Toil, and Trouble

In Shakespeare’s Scottish play Macbeth, three witches prophesize the protagonist’s imminent rise and fall. This week, Deutsche Bank released its…


2021 Market Preview

2020 was a year like no other and has left investors across the world wondering what the future looks like….

Graphic of darkened photo of city buildings, with guidance pattern overlay and "2021 Market Preview" in white.


2021 Market Preview Video

This video coincides with our 2021 Market Preview newsletters and provides a high-level summary of each,…

Chart subtitle: Projected GDP growth rates across the globe more optimistic heading into the year. Chart description: Bar chart showing Annual GDP Growth Rate on y-axis, with 2019 Actual, 2020 Projection, and 2021 Projection for (x-axis) World, United States, European Union, United Kingdom, Germany, Japan, Emerging Markets, China, and India. All categories show positive for 2019 and 2021 projection; all categories except China negative for 2020 projection. Chart source: IMF.


Glass Half Full?

As we are beginning to see a possible finish line on the COVID-19 front, there is an expectation in the…


Tech Bubble Revisited? Contrasting the Current Landscape with the Dot-Com Boom and Bust

Continued strong performance of technology-oriented stocks through disparate economic environments, elevated valuations, and increasing concentration within the growth space have…

Line chart showing M2 Money Stock in teal and Velocity of M2 Money Stock in green. Chart subtitle: M2 continues to grow while money velocity dips. Chart description: Left Y-axis shows $ in billions, ranging from 0-$20,000. Right Y-axis shows Velocity from 0.0-2.5. X-axis shows time since January 2000, through August 2020. Recessions are marked by shaded grey bars, denoting the dot-com bubble in the early 2000s, the Global Financial Crisis in 2008, and the current recession which began in March 2020. M2 Money Stock line begins near $4,000 in January 2000 and is currently near $19,000. Velocity line begins near 2.0 in January 2000 and is currently near 1.2. The two lines converged around October 2015. Recently the M2 Money Stock has climbed sharply and Velocity dipped significantly in 2020 but most recently slightly grew. Chart source: Federal Reserve Bank of St. Louis as of December 31, 2020.


Is Velocity Stifling Inflation Amid Record Growth of Money Supply?

Inflation has remained well below 3% in the United States for nearly a decade despite a record economic expansion and…

More articles

Subscribe to Research Email Alerts

Research Email Alert Subscription

Research alerts keep you updated on our latest research publications. Simply enter your contact information, choose the research alerts you would like to receive and click Subscribe. Alerts will be sent as research is published.

We respect your privacy. We will never share or sell your information.

Thank You

We appreciate your interest in Marquette Associates.

If you have questions or need further information, please contact us directly and we will respond to your inquiry within 24 hours.

Contact Us >