Does increased government spending negatively impact a country’s economy and financial markets? With so many questions surrounding this issue lately, it’s no wonder clients ask us about it quite a bit.
This article, adapted from Marlena Lee’s presentation on the Economics of Fiscal Deficits, looks at historical evidence to answer these and other common questions about sovereign debt and the potential impact on investor’s long term wealth. The bottom line conclusions:
(1) High deficits might dampen future economic growth, but that’s not a certainty.
(2) Deficits don’t necessarily result in poor investment returns. In fact, they may have the opposite effect of driving up future expected returns, to compensate investors for the higher risk.