Portfolio Manager Insights

The U.S. Treasury has reported that the national debt surpassed $30 trillion in 2021, a fact that has fueled headlines and concerns. This means that the federal debt has doubled over the past decade and, with very few exceptions, has grown nearly every year over the past century. This also adds to the recurring fiscal debates over the debt ceiling, avoiding government shutdowns, the size of economic stimulus bills, and more. How can investors view government spending with the right perspective and stay focused on what drives markets in the long run?

Naturally, the large and ever-growing national debt is a controversial topic that impacts the economy and markets in complex ways. At its core, budget deficits occur when the government spends more than it collects in taxes and other sources of revenue, which adds to the total debt. Even though tax revenues tend to increase as the economy grows (even without raising tax rates), they have been outpaced by spending over time. These expenditures have grown across "mandatory" programs such as Social Security and Medicare as well as "discretionary" items such as defense and education. The shortfall is funded by government borrowing, i.e., by issuing Treasury securities.

It's important to distinguish between what should matter as investors and what might matter as citizens, voters and taxpayers. As individuals, many have strong personal and political views on government spending and taxation, and what it may mean for the country over the coming generations. However, this can be distinct from whether deficits directly or indirectly impact the economy and markets. From a portfolio perspective, investors typically worry about how the debt is measured, whether it will cause interest rates to rise, if it will drive up taxes, and more. Here are three facts to keep in mind on what the growing national debt does and doesn't mean.

Key Takeaway:

1. The federal deficit has remained high due to ongoing stimulus programs. While this can be alarming to some, history shows a clear pattern of deficit spending during crises. This then improves once the economy gets back on track.