Massive budget deficits have sent U.S. debt soaring past $38 trillion, but they have also become the primary driver of corporate profits and stock valuations, according to Research Affiliates.
In a recent note, Chris Brightman, who is a partner, senior advisor, and board member at the firm, and Alex Pickard, senior vice president for research, traced the historical trend between the deficit and how earnings are recycled to inflate asset prices.
“In the financialized U.S. economy, each dollar of deficit spending may flow into a dollar of corporate profit,” they wrote.
Annual budget deficits have reached $2 trillion, with debt-servicing costs alone hitting $1 trillion. As federal spending exceeds revenue by wider margins, the Treasury Department must issue greater volumes of bonds.
Much of the money the government raises by selling debt goes into consumers’ pockets, primarily via entitlement payments, which eventually boost profits, according to Research Affiliates.
