Our Market Optics chartbook contains data-driven insights that power our portfolio management teams’ views, ideas, and decisions. Each week, we’ll take a look a closer look at one of the charts.

This week’s topic: Global economy: Fiscal policy

·         Entering the coronavirus crisis, investors were worried about elevated deficits in countries like the U.S. Deficits as a percentage of gross domestic product (GDP) were never that high during peacetime. Other countries, like Germany, were reluctant to engage in deficit spending. The concern was that if a shock happened, those who needed to spend wouldn’t have the “fiscal space” to do so while those who could spend wouldn’t be willing to.

·         When the pandemic hit, the fiscal policy response was uniformly big and bold. The U.S. showed that despite high budget deficits, there was plenty of appetite for more government debt. Even Germany announced spending programs in the low double digits of GDP.

·         The Congressional Budget Office (CBO) said the federal budget deficit is expected to come in at $2.3 trillion. That’s down from the $3.1 trillion in 2020, but it doesn’t include any spending proposed under President Biden’s stimulus plans. The CBO said debt held by the public (which includes what the Federal Reserve holds) is expected to rise to 107% by 2031. For perspective, Japan’s is nearly 250%. Fed officials have been encouraging more government spending, figuring that the economy is still in the recovery room and we can wait to worry about fiscal prudence until the economy is fully recovered.

·         Now that economic restrictions are lifting, investors are beginning to wonder how the bills will be paid. If post-wartime fiscal policies are any historical guide, it’ll likely be from a combination of central banks keeping government financing costs abnormally low, a slight bending of the government spending curve, a little faster economic growth, and perhaps eventually higher taxes. The bills will come due, but not all at once.

Get more charts and insights like this by downloading our Q4 Market Optics chartbook today.


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