An explanation that deserves more attention is deficit spending. Governments have long used deficits to bolster economic activity, and the annual federal deficits since 2009 have been the highest on record. Consider that from 1970 to 2008, roughly around the time that deficits became the norm, the average annual deficit was $129 billion. Since 2009, that average has jumped to $882 billion. More than any other single factor, that spike in deficit spending most likely fed the earnings growth behind this bull market.
And if you think deficits are high now, just wait for President Sanders. His long and expensive wish list includes health care, housing and college for all, not to mention an ambitious Green New Deal. Sure, some of the money may come from higher taxes, but no one doubts that much of it will be added to the nation’s debt. One estimate pins the cost of Sanders’s proposals at up to $97.5 trillion.
Stephanie Kelton, an economic advisor to the Sanders campaign, told Bloomberg TV recently that the U.S. could “safely increase the deficit, let’s say by another $500 billion or so, before we begin to see inflation accelerating to something that we would consider problematic.” Kelton has become the public face of Modern Monetary Theory, which posits that a country with its own currency, such as the U.S., can accumulate as much debt as it wants as long as inflation remains in check. Not surprisingly, the theory is increasingly popular with progressives who support big, Bernie-esque initiatives.
Additional deficits of $500 billion a year probably wouldn’t be enough to pay for Sanders’s proposals, so expect a Sanders administration to push MMT to its limits. What if all that spending sparks runaway inflation because supply can’t keep up with demand? No one really knows because MMT is untried. But in a consumer-driven economy, cheaper health care, college and housing would free up money to spend elsewhere, even after accounting for modestly higher taxes on ordinary Americans, and U.S. companies would scramble to pick up the loose change.
It’s anyone’s guess what a huge increase in deficit spending would ultimately do to the U.S. economy, and there are legitimate reasons to worry about the unintended consequences of a debt-fueled experiment. But in the near term, don’t be surprised if all that spending continued to juice corporate earnings and the U.S. stock market.
This article was provided by Bloomberg News.