Bridge over ocean
1 March 2007 Financial Analysts Journal Volume 63, Issue 2

Do the Markets Care about the $2.4 Trillion U.S. Deficit?

  1. Jagadeesh Gokhale
  2. Kent Smetters

If the U.S. federal government properly accounted for its explicit and promised liabilities, it would record a national debt of $64 trillion and a national deficit of $2.4 trillion in 2006. Although capital markets seem to care about the officially reported budget deficit—a metric that is backward looking and quite misleading—the markets have done little more than yawn at the federal government’s mammoth, and growing, forward-looking budget imbalance. Are investors uninformed? They should remember that the common belief that capital markets cannot fail is precisely the reason why they can.

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