The Market Ticker
Commentary on The Capital Markets- Category [Market Musings]

A few minutes ago President Trump said deficits are out of control.

He's right, of course.

In point of fact the real deficit increase was $1.4 trillion last year.  How do we know this?  Because debt to the penny (an official Treasury site) tells us exactly how much the federal government has "borrowed."

I put "borrowed" in quotes for a reason: Banks, including the Fed, do not actually lend out deposits that were previously made.  Instead what they do is push a button, credit your account and cover the reserve requirement when the money is spent and someone else deposits it.

As such borrowing by the federal government, which is not backed by collateral that has already been made and is removed from the market until said loan is repaid, always and immediately creates monetary inflation.

You cannot control where this shows up in prices but that it does and always will is a mathematical fact.

Last year GDP was operating at about an $18.7 trillion in the third quarter (when the total deficit increase was totaled as well; Sept 30 2016.)  This means that approximately 7.5% monetary inflation occurred last fiscal year.

How much was the stock market up during that time?   From 1951 -> 2168 (S&P 500), approximately, or roughly 11.1%.

Or was it?

No, it was actually up 11.1 - 7.5% in real terms or 3.6%.

What happens if the deficit goes to zero.  Then the market at best grows at about 1/4 of the rate it was before.

This, of course, assumes the stock market got an average benefit from that inflation.  In point of fact it probably got a much larger than average benefit.  Why do we know this?  Because corporate profits have not been accelerating materially and the market is now trading at crazy price:sales ratios -- which have only been seen before in the near term before serious corrections or even crashes.

So again -- what do you expect to happen if the fuel that has driven the market up disappears?

You might want to start thinking about that.

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