Trump and Bessent Reverse Stances, Signaling Potentially Positive Impact on Stock Market
President Donald Trump's election victory in late 2016 ignited speculation about the economic implications of high fiscal deficits. In an analysis published weeks afterward, I posited that financial markets might respond favorably to stimulus, such as large fiscal deficits.
The traditional perspective on high deficits poses several challenges. For instance, increased government borrowing can crowd out private investment, leading to a decline in future economic growth. Moreover, the rise in national debt could result in higher interest rates, financial market volatility, and a reduction in annual GDP.
However, some counterintuitive analyses suggest that high fiscal deficits may provide short-term benefits, particularly in the wake of recessions or periods of weak demand. For example, an increase in government spending can boost aggregate demand, spur employment, and inject liquidity into financial markets. Furthermore, during periods of persistently low interest rates, high deficits might be more sustainable when paired with financial repression tactics.
In contrast, long-term deficits could lead to financial market distortions, market inefficiency, and an unsustainable reliance on unconventional monetary policies. Thus, without corrective measures, the negative effects of high fiscal deficits may prevail, with potential consequences including slower growth, higher market volatility, and the risk of financial repression.
While my December 2016 analysis did not delve into the specifics of the effects of high fiscal deficits on financial markets, it contributed to the ongoing debate about the role of stimulus in the economy. The long-term implications of high deficits remain a contentious issue, with renowned economists weighing in on the short-term stimulus benefits versus the long-term economic repercussions.
The government's potential increase in financing, as a result of high fiscal deficits, might influence the stock-market by either crowding out private investment, leading to economic growth decline, or boosting aggregate demand, stimulating employment, and injecting liquidity into the financial market. During periods of stimulus, such as those following Trump's election victory, some financial analysts argue that investing in the stock-market could offer short-term advantages, though the long-term reliance on such deficits might lead to market distortions and inefficiency.
