MARKET UPDATE - Why The Fiscal Deficit Won't Necessarily Lead To High Interest Rates

There is always something to worry about.

Since the stock market came into existence, there has been a continuous parade of wars, recessions, depressions, bank runs, crashes, pandemics, stagflations, regime changes, high interest rates, negative interest rates, and about 700 Marvel movies.

Through it all, humanity has survived and continued to advance. Publicly traded companies, including REITs, have been resilient and proven themselves capable of growth and innovation no matter what.

Another apparently unstoppable force that has been at play for centuries is the national debt.

Since the 1970s, the US government has almost continuously run a fiscal deficit, interrupted briefly by a period of fiscal surplus in the early 2000s as a result of capital gains from the Dot Com bubble. And for decades, people have worried about this endless ballooning of the national debt.

Almost everyone would insist that this cannot go on forever. And yet, no one can say how long it can go on. And, perhaps more critically, no one can predict how exactly it would end if it was brought to a halt.

A prevailing view is that the US will lose its global reserve currency status, foreigners won't want to buy our Treasuries anymore, interest rates will surge higher, and the American economy will suffer a severe and prolonged (perhaps indefinite) contraction.

Another point that proponents of this view would note is that the US has enjoyed reserve currency status for about the average length of time that previous reserve currencies enjoyed during their own respective heydays.

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This pessimistic view was lent a boost from none other than Warren Buffett, the Oracle of Omaha, during the most recent Berkshire Hathaway (BRK.B) annual meeting when he said:

We’re operating at a fiscal deficit now that is unsustainable over a very long period of time. We don’t know whether that means two years or 20 years, because there’s never been a country like the United States. But you know, this is something that can’t go on forever . . . and it has the aspect to it that it gets uncontrollable at a certain point.

These bearish fiscal hawks might point to the recent decline of the US dollar (against other global currencies) as evidence that this process has already begun.

We doubt that.