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

Diversification: Disciplinarian of Disciplinarians

By
Disciplined diversification works when you do and even when you don't want it to. Diversification in effect forces you to sell the thing that has been doing so well in your portfolio and to buy the thing that hasn't. While this makes rational sense, it is emotionally difficult to execute. Think back to the tail end of 2008--were you selling bonds and cash to buy stocks? Most likely you weren't unless your advisor or some sort of automatic trigger did it for you. Carl Richards of www.behaviorgap.com provided a good reminder of how diversification works in a recent NY Times blog post. The diversification he discusses here is more so related to equity asset-class diversification but also touches on the three basic building blocks--equities, bonds, and cash. He doesn't discuss alternative asset classes -- an asset class that doesn't fit neatly into the three basic categories -- being used to further diversification, but that's a detailed topic for another day.
Read more

The Value of Double-Checking & Monitoring Your Retirement Strategy

By
Motivational speaker Denis Waitley once remarked, “You must stick to your conviction, but be ready to abandon your assumptions.” That statement certainly applies to retirement planning. Your effort must not waver, yet you must also examine it from time to time. 1       Perhaps you may realize that you under-estimated your health insurance costs and will need more retirement income than previously assumed. Or perhaps, with today's low interest rates you are not getting the level of investment returns you counted on. With those factors and others in mind, here are some signs that you may need to double-check your retirement strategy.     Your portfolio lacks significant diversification. Many baby boomers are approaching retirement with portfolios heavily weighted in U.S. equities. As many of them will have long retirements and a sustained need for growth investing, you could argue that this is entirely appropriate. Yet, U.S. equities by some measures may be over-valued by
Read more

65-80 Year Olds … A New and Exciting Demography

By
Should today’s 70-year-old American be considered “old?” How do you define that term these days? Statistically, your average 70-year-old has just a 2% chance of dying within a year. The estimated upper limits of average life expectancy is now 97, and a rapidly growing number of 70-year-olds will live past age 100. Perhaps more importantly, today’s 70-year-olds are in much better shape than their grandparents were at the same age. In most developed countries, healthy life expectancy from age 50 is growing faster than life expectancy itself, suggesting that the period of diminished vigor and ill health towards the end of life is being compressed. A recent series of articles in the Economist magazine suggest that we need a new term for people age 65 to 80, who are generally healthy and hearty, capable of knowledge-based work on an equal footing with 25-year-olds, and who are increasingly being shunted out of the workforce as if they were invalids or, well, “old.” Indeed, the a
Read more