The Mounting Budget Deficit Risks Escalating Market Volatility

Updated: Feb 9, 2018

The soaring deficit in the federal budget will force the United States to borrow more than $1 trillion this year. This borrowing will undoubtedly worsen the fever behind the global sell-off in stock markets.

The budget deal Senate leaders reached late Wednesday would add nearly $300 billion in government spending over two years and push the deficit higher. Even beforehand, Bank of America Corp. senior U.S. economist Joseph Song warned in a report that the federal deficit was on track to exceed 5 percent of gross domestic product by 2019, by far the largest for the economy while at full employment since World War II.

That is “exactly the opposite of what the economic textbooks say lawmakers should be doing,” Mark Zandi, chief economist of Moody’s Analytics Inc., said in an email. “Deficit financed tax cuts and spending increases in a full-employment economy will result in more Fed tightening and higher interest rates.”

Investors remained on edge Thursday as the resurgent threat of inflation and higher bond yields renewed concerns that rising interest rates will drag on the economy. U.S. stocks dropped for the fourth time in five days. The DOW was down over 1000 points today. The S&P 500, meanwhile, was down about 2 percent today.

It may be a good time to limit your exposure to this type of market volatility. Protection of assets should be everyone's priority when the markets behave the way they are now. Having a portion of your portfolio in precious metals could protect your portfolio from market volatility.


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