Why investors will likely applaud a national debt that exceeds $ 25 trillion
Pump the US economy with liquidity derived from debt to move it past the coronavirus pandemic, face the financial consequences of a weakening US balance sheet later.
That seems to be the vibe on Wall Street – and inside the White House – right now.
The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite surged 25% from mid-March lows as the US government passed $ 2.3 trillion in stimulus for the struggling economy . All that has been done is take inflated US debt to new highs – around $ 24.7 trillion as of Monday afternoon.
The markets have ignored the growing debt, believing that it is better to stimulate further given current economic realities and that the cost of debt is low thanks to the Federal Reserve’s unprecedented efforts on rates – so the debt could be refinanced and blocked at a lower cost. .
Treasury Secretary Steven Mnuchin warned the United States will face growing budget deficits “over time” in a weekend interview with Fox News. But, Mnuchin stressed the more pressing need to take all possible measures to revive the US economy.
“The market cares about stimulus measures and will worry much later about the public debt when it creates a situation where there must be a lot of budget cuts. I don’t see that day coming so soon. So I would expect the market to encourage the government to take on more debt as long as it is used for an effective stimulus, ”said Kristina Hooper, chief global markets strategist of Invesco on Yahoo’s The First Trade. Finance.
This thesis is likely to be tested in the months and years to come.
Goldman Sachs strategists said Monday they expected an additional $ 500 billion to be added to the current fiscal year deficit, reflecting a new round of stimulus. The investment bank sees an additional $ 1.5 trillion added to the deficit over the “next two years.”
“Additional fiscal support to the economy appears to be needed,” the strategists wrote.
At some point in the future, the Federal Reserve will be forced to raise interest rates. This risks upsetting the US economy because of its excessive debt level. But as the pros lightly suggest today, in the long run, we’re all dead. Let the debt be dealt with by the next generation – earning money and preserving today is of greater importance.
Brian Sozzi is editor and co-presenter of The first trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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