Silly Season for Budget Deficit

In our view, election time is always the silly season for the Federal budget deficit. This is because politicians like to rant and rave about the deficit. The fact is, it doesn't and never did have much impact one way or the other on interest rates or stock returns.

We've always thought the concern was misplaced, anyway. Shouldn't we be more focused on overall spending trends? Would you rather have a federal government that spends 18% of GDP but only confiscates 17% of GDP in receipts or a government that spends 22% of GDP but balances the budget? I'll take the former. In reality, congressman would prefer continual work on narrowing the deficit but only through increases in revenues. This provides more opportunity to run deficits and ramp up spending. It appears to make no difference if your congressman is a Republican or Democrat, the result is the same. Why are the Republicans in so much trouble this year? They were elected in 1994 on a platform of limited government. Spending is up 49% in the last 5 years. Voters figure that if Congress has no interest in spending constraint they might as well vote for the real champions of pork - Democrats.

How does this play into investments over the short-term? We think that as investors come to believe Congress may swing to the Democrats, that stocks will take a breather. Government spending won't be much different.