Skip to main content

The Economics of Fiscal Defecits

Image
By
It's quite difficult if not virtually impossible to have forecasting abilities to consistently predict future economic scenarios. Even if a prediction about what will happen to our economy is done accurately, an investor is not done yet. In order to capitalize upon an accurate economic prediction, the investor must still translate the economic prediction into a successful investment strategy and must also get the timing of it correct. No small feat indeed.

As we get through a political season where much in relation to our country's economics have been discussed or at least used in the negative political ads that seemingly permanently reside on my television, it's helpful to keep things in perspective and look at things objectively. Marlena Lee, Researcher with Dimensional Fund Advisors, examines historical data to test the relationships between fiscal deficits, interest rates, business activity, investment returns, and exchange rates in a video and/or podcast available by clicking the link below.

http://www.dfaus.com/2010/11/the-economics-of-fiscal-deficits.html

To summarize her findings, Marlena academically tested the following economic questions and their potential investment implications. The short answer to the question is shown bolded in ALL CAPS.

Economic Questions:


• Are deficits related to higher long-term interest rates? YES

• Do large deficits stifle long-run economic growth? YES

• Are fiscal deficits linked to current account deficits? INCONCLUSIVE

Investment Implications:

• Do interest rates efficiently incorporate information about fiscal policy? YES

• Do deficits predict bond or equity returns? NO

• Does low future economic growth imply low future equity returns? NO

• Do fiscal deficits and/or current account deficits predict short-term exchange rate movements? NO

Remember, in our era of the in-your-face, usually negative media, it's important to stay objective. The sky may not be falling after all.

Kevin Kroskey, CFP, MBA
Labels:

Popular posts from this blog

Bangladesh Butter Production Predicts U.S. Stock Returns

By
After reading the title of this post, my hope is that a look of disbelief is cast on your face. Of course butter production in Bangladesh has nothing to do with prediction of US stock market returns. However, through data mining all sorts of 'relationships' can be demonstrated. Many mutual funds, ETFs, and trading strategies are built upon these data mining strategies--most often to the harm of investors that utilize them. As Jason Zweig describes in a recent article in the Wall Street Journal, entitled Data Mining Isn't a Good Bet For Stock-Market Predictions , "The stock market generates such vast quantities of information that, if you plow through enough of it for long enough, you can always find some relationship that appears to generate spectacular returns -- by coincidence alone . This sham is known as data mining." I recall in from my business statistics course in grad school, how I was able to show that ice cream consumption was correlated to the murder ra
Read more

Don't File Your Taxes Too Soon

By
I'd like to remind everyone to not be too anxious to file your taxes. Many taxpayers rush to file their tax returns as quickly as possible. Ordinarily, that’s fine. But if you own mutual funds, don’t file your tax return before March 1. In past years, revised 1099s were often issued, reclassifying distributions and/or their amounts. This was a huge headache for the investors who had already filed tax returns based on the original documentation. These hapless consumers found themselves forced to redo their returns and file amended tax returns, adjusting the amount they owed or were due in refunds - and paying their tax preparer additional fees to do the extra work. It looks like 2010 may be the same. Therefore, if you own mutual funds, do not file your tax return before March 1. By then, any amended IRS forms are likely to arrive, potentially helping you avoid the hassle and costs of filing an amended return. Kevin Kroskey, CFP, MBA
Read more

Paying for College and Getting Your Money's Worth

By
According to the Student Loan Marketing Association (more commonly known as Sallie Mae Bank), the average tuition, room and board at a private college comes to $43,921. Public tuition for in-state students at state colleges amounted to $19,548 (about half of which is room and board), with out-of-state students paying an average of $34,031. How are parents and students finding the cash to afford this expense? Sallie Mae breaks it down as follows: 34% from scholarships and grants that don’t have to be paid back, coming from the college itself or the state or federal government, often based on need and academic performance. Parents typically pay 29% of the total bill (an average of $7,000) out of savings or income, and other family members (think: grandparents) are paying another 5%. The students themselves are paying for 12% of the cost, on average. The rest, roughly 20% of the total, is made up of loans.  The federal government’s loan program offers up to $5,500 a year fo
Read more