Deficits Are Horrible, But They Are Bullish

The final stats are in for fiscal year 2024, and the federal debt in the U.S. grew by $2.297 trillion versus a year earlier, and as of Sep. 30, 2024, the total debt stood at $35.465 trillion. 

Those who are fans of the fine print will note that on the very next day, Oct. 1, 2024, the total debt jumped by another $204 billion, or 8.9% of last year's debt increase, as the folks at the Treasury Department unleashed a bunch of bill payments that they held back to make FY2024 look better.  If you are interested in tracking these numbers yourself, you can check them out every day at https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny.

It is further worth noting that this increase in the total federal debt is larger than the stated fiscal year deficit, because Uncle Sam's bookkeepers do funny things with how they account for such things.  The final numbers on taxes and spending for FY24 are not out yet, but as of the end of August 2024, the trailing 12-month deficit was "only" $2.063 trillion, which is a lot lower than the change in the total debt. 

Having such a large and increasing debt load is a really bad thing for our grandchildren to someday have to pay back.  But it is a wonderful thing for stock market investors, because deficits are bullish.  In the rare instances when Congress has suffered from a bout of responsibility, trying to bring down the debt has been bearish for stock prices.  I have highlighted some examples in this week's chart, above.

Episode 1 was right after the September 1929 peak for the stock market.  Banks were folding, and both President Hoover and the Congress figured that the Federal government ought to conserve its resources ahead of an impending economic slowdown.  So in both 1929 and 1930 there were budget surpluses.  Economist John Maynard Keynes later won fame for writing about how this was the wrong approach to take in the face of an economic slowdown. 

Episode 2 came after World War 2 had finished, and Congress decided it was time to pay back a lot of the "war bonds" which Hollywood stars had helped promote the sale of during the war.  The total debt peaked on an annual basis in 1946 at $269 billion, which was 118.3% of GDP that year.  It fell for the next two years, dropping to $252 billion by 1948, which was 92.6% of GDP.  But then Congress could not keep up the debt repayments and they went back to their old ways, which was fortunate for stock investors in 1949 and later. 

Episode 3 was in 1956 and 1957, when Eisenhower was president.  By the end of 1957, debt was $274.9 billion, which in nominal terms was not that much more than at the end of WWII, but as a percentage of GDP was down to just 57.9%.  But running those surpluses in 1956 and 1957 had a terrible effect on the stock market.  My father Sherman was just graduating from college in 1958, with a degree in business and finance, and hoping to find a job in the investments field.  But the bear market of 1957 had led to a 20% drawdown in brokerage firms' employment, so nobody was looking to hire anyone fresh out of college then.  He had to take a different path in life, just because of Congress trying to pay down the federal debt a little bit. 

1957 was the last fiscal year that the total federal debt actually fell.  But I include Episode 4 in the chart, which was the year 2000 when the government came really close to running an actual surplus.  That loss of deficit spending stimulus was still enough to kill the Internet Bubble, and to usher in a new party into the White House promising tax cuts to help the economy.  And that remedy did help both the economy and the stock market, but it did not help the debt.

No Congress and no president since 2000 has ever come close to balancing the budget, which has been tremendously helpful to the stock market.  But it has also been tremendously stimulative to raising the total federal debt.  At the end of FY2000, total debt stood at $5.67 trillion, which is such a cute little number compared to today's $35 trillion debt. 

I mention all of this because as investors, we should pay attention to what future Congresses and presidents do with our tax money.  If they keep running up the debt to even higher levels, that will compound the problems for future generations.  But it will be bullish for stocks.

And deficits are also really bullish for gold too.

This chart looks at the reported deficit, as opposed to the actual change in total debt, and it is expressed as a percentage of GDP.  When the deficit is rising, that tends to be really bullish for gold prices.  Conversely, a period when the deficit is still positive but getting smaller has been a tough condition for gold prices to do well. 

The price low in 2001 had this factor pushing down gold prices, and that was compounded by the Bank of England in 1999-2001 deciding that there was not much point in holding onto their large hoard of gold, and so they were making regular sales of as much as 25 tonnes a month back then.  Gold prices bottomed below $260/ounce, and gold is now worth 10x that amount.  I bet the BoE honchos who may still be alive are regretting that move. 

The reason why all of this is important now is that we have a big election coming up in 1 month in the U.S.  I won't pretend to tell anyone how to vote.  If you are reading this, you are smart enough to make your own decisions, and no one is going to be swayed anyway by what I might say about who to vote for.  But I will suggest that everyone who is an investor should be prepared for what might come after the election, as the next Congress and the next president work to grapple (or not) with the size of the U.S. total federal debt.  Their decisions will have a big impact on what stock prices and gold prices are likely to do in the years ahead.  A rising debt load is a horrible thing, but it is a bullish thing.  And trying to pay down the debt is a bearish thing.