Wednesday's Market Minute: Deficit-Mongering Means One Thing: We Are So Back

Financial airwaves have been hijacked by paranoia over the federal deficit the past few weeks and it's as good a sign as any that things are returning to normal.

Worrying about U.S. debt levels is about as productive as worrying about the sun burning out: yes, one day our bright star of American dominance will fade, but it happens on an infinite time horizon that shouldn’t cause any sweat. What matters is if the rate at which the sun is burning out is increasing, and there are some ways for us to know if it’s happening.

The best sign that our spending is becoming a problem is if our currency begins losing value at an unprecedented rate. It is not. In fact, it’s doing the opposite. The dollar is not just strong on a comparative basis to a basket of other currencies, it’s continued to appreciate over the past decade and is rallying again as our economy has proven strong enough to withstand extreme hikes in interest rates by the Federal Reserve. Our currency is used in 48% of international payment transactions, the highest in a decade, according to SWIFT data compiled by barchart.com. 

One ostensible reason why deficit doomsayers are back in style is because of the big move higher in U.S. Treasury yields. They say it’s a sign of waning demand for our debt due to concern we won’t be able to pay it back. That is completely unsubstantiated by the evidence. If there were fear over our credit-worthiness, Treasury auctions would be going poorly. They’re going fine. The big moves in yields have happened very clearly on days when the economic data comes in stronger-than-expected. 

All the evidence is that higher rates are a welcome sign of an economy finding its footing despite the most aggressive rate-hiking regime in history, and that is worth celebrating. We’re the only economy beating Covid-era growth expectations, according to this week’s IMF analysis – it’s an incredible feat, especially considering how much inflation has slowed simultaneously.

Worrying about how much we’re spending is a nebulous fear that is always hanging over one bearish cohort of market participants as a way to paint a frightening picture of American demise. It's a theory that's never manifested itself into actionable market events, and there's no sign it's going to anytime soon. That it's the best some bears can come up with right now is more a sign that things continue to normalize after the true black swan of the Covid era. It’s also a tell-tale sign that we’re approaching election season, because most deficit commentary is political punditry masquerading as market analysis.

Image sourced from Shutterstock

This post contains sponsored content. This content is for informational purposes only and not intended to be investing advice.