This is an incredibly boring subject I know. I've mentioned it many times and perhaps it gets a bit old. But I feel it is important to say it once again; deficits matter. The higher the deficit, the greater impact on long-term economic growth as debt service costs sap potential economic expansion.
The latest legislative and administrative action ensures that the deficit will continue to rise. It is expected to hit a record high in the not too distant future. The recent article summarizes the current state of deficits in the United States.
US government posts $8 billion deficit in June
The U.S. government posted an $8 billion budget deficit in June, according to data released on Thursday by the Treasury Department.
Analysts polled by Reuters had expected a $6.35 billion deficit for the month.
The Treasury said federal spending in June was $342 billion, down 12% from the same month in 2018, while receipts were $334 billion, up 6% compared with June 2018.
The deficit for the fiscal year to date was $747 billion, compared with $607 billion in the comparable period the year earlier.
When adjusted for calendar effects, the deficit for June was $55 billion compared with an adjusted deficit of $30 billion in June 2018. Calendar adjustments had little effect on the year to date figures.
Source: July 11, 2019; Reuters article
It is hopeful that long-term growth will be enough to wash away the growing deficit problem. We certainly hope so, but the growth rate required to knock away deficits needs to be pretty spectacular. The other alternatives, raising taxes and decreasing spending, don't seem to be very popular.
The consequence of high deficits is very simple: slower long-term GDP rates, reduced economic expansion, susceptibility to interest rate increases as US treasury rates are tied to the US deficits, and a host of other issues.
We are investing on the assumption that no tangible action will be taken in the near future and have positioned portfolios accordingly; that’s the reality of the world we face today. For the time being, deficits are here to stay.
If you have any questions, please let me know. Happy to answer any of your comments or thoughts.