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

Abstract

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.

Keywords: Economics, Macroeconomics, Relationship of Economic Activity to the Investment Process