The Bus No One Is Watching: The Federal Deficit

With the coronavirus pandemic seemingly under control, investors have moved on to other worries. Specifically, they’re worried about the election, the value of the dollar, and inflation—and what all of these factors mean for their portfolios. Not surprisingly, election concerns arise every four years, while worries over the dollar and inflation pop up whenever things look a bit dicey. What is surprising, though, is that despite all of the uncertainty out there, not many seem concerned about the federal deficit.

Deficit Risks Haven’t Gone Away

Historically, the deficit has started to swell toward the third quarter, which generates headlines and fear. Then the deficit subsides again, and the headlines and fear go away. Historically, questions and concerns arise during that same time.

But that didn’t happen in 2019, and so far it hasn’t happened in 2020. There have been lots of questions about other things, but there haven’t been many questions about the deficit. This apparent lack of concern is despite the fact that the deficit hit $1 trillion in 2019 and is now well on its way to $3 trillion. It’s not that the risks from the deficit have gone away. Quite the contrary. It isn’t even that people are focused on other things, like the pandemic, as that has not stopped the inflation and dollar questions. So, what’s going on?

Politics Vs. Economics

The reason may have more to do with politics than economics. But, regardless of why, the fact that the deficit is much less an object of public fear is worrisome. I’ve always said that the deficit and the debt are a problem, but a solvable one. A base assumption of that conclusion, however, is that we collectively would at some point decide to solve the problem. That outcome is starting to look less likely.

In politics (and this is a political question), nothing happens until the pain of the solution is less than the pain of the problem. The pain of the solution, with spending cuts and tax increases, would be substantial. With no public concern about the deficit and debt raising the pain level of the problem, there will be no solution.

You can see this lack of concern in the policies from both sides. Recent trillion-plus deficits have come from the Republicans, while the Democrats support the idea that deficits don’t matter (a key tenet of Modern Monetary Theory). It’s not clear where the constituency for the pain necessary to reduce the deficit, much less balance the budget, is going to come from. Maybe there simply isn’t one anymore, and that is the problem.

The Bus We Should Be Watching

The bus you are looking for is not the one that hits you. Right now, investors are worried about the dollar and inflation. What they should be worried about, however, is the bus no one is watching: the deficit.

Fortunately, this is a slow-moving bus, and a collision is not imminent. But it is a bus we should all be watching.

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