Why the Huge Widening in the U.S. Deficit Could Move Markets — Transcript

Full transcript

1. 0:00- The U.S. government is expected to borrow
2. 0:01$2 trillion a year for the next decade.
3. 0:05That's huge and unprecedented.
4. 0:07Investors are starting to think
5. 0:09that all this borrowing could have some major impacts
6. 0:12on stocks, bonds, and all kinds of other investments.
7. 0:15I'm going to explain why the government is borrowing
8. 0:17so much money, why all that borrowing will impact markets,
9. 0:21and what this could mean for the investing world
10. 0:23in the near future.
11. 0:25Let's get into it.
12. 0:26The U.S. national debt recently hit $33 trillion,
13. 0:29and the Congressional Budget Office estimates
14. 0:31our debt could surpass $40 trillion in five years.
15. 0:35That's because even though the government isn't rolling out
16. 0:38any big new stimulus programs,
17. 0:40it is bringing in a lot less revenue
18. 0:42than it did over the past two years.
19. 0:44Revenue is basically shorthand for taxes.
20. 0:47The government is collecting less taxes
21. 0:49because people are collecting less capital gains
22. 0:51on the sale of things like stocks, businesses, and houses.
23. 0:54Remember, you pay taxes
24. 0:56in the year following taxable events.
25. 0:59So the taxes from big stock and housing market gains
26. 1:02we saw in 2021 were largely recorded in fiscal year 2022.
27. 1:07The government is also paying a lot more in interest
28. 1:10so it can borrow money to pay for the deficit.
29. 1:13The interest rate on two-year government bonds
30. 1:15at the beginning of 2022 was less than 1%.
31. 1:19Now that rate is over 5%.
32. 1:22When you're paying interest on billions
33. 1:23or trillions of dollars in debt, that difference adds up.
34. 1:27Jefferies U.S. economist Thomas Simons
35. 1:30is expecting the government to issue just under $4 trillion
36. 1:33in medium and long-term debt in fiscal year 2024,
37. 1:36and it's going to have to sell that debt at the same time
38. 1:39that some of the largest buyers are cutting back.
39. 1:42The Federal Reserve is the largest holder of treasury bonds,
40. 1:45but the U.S. Central Bank is projected
41. 1:47to reduce its holdings
42. 1:48by up to $60 billion per month moving forward.
43. 1:51And the latest report from the Treasury Department
44. 1:53shows China cut its holdings of U.S. government bonds
45. 1:56to the lowest level since May 2009.
46. 1:59China was the largest foreign holder of U.S. government debt
47. 2:02as recently as 2019
48. 2:04and held more than $1 trillion in treasuries in early 2021.
49. 2:08But the country has reduced its holdings
50. 2:10by almost $300 billion since then.
51. 2:12When there's more supply and less demand,
52. 2:16that usually means that prices fall.
53. 2:18For bonds, it also means that yields rise.
54. 2:21Treasury yields reached their highest level
55. 2:23in more than 15 years in September,
56. 2:26and the mountain of new debt that's coming
57. 2:28could push them even higher.
58. 2:29Higher yields historically increase the value of the dollar
59. 2:32and boost the attractiveness of safe assets
60. 2:35like money market funds.
61. 2:36Retail traders and professional money managers
62. 2:38have pushed a record amount of cash into money market funds
63. 2:42which are paying the highest interest rates in decades.
64. 2:45Higher yields also have made investments
65. 2:47in risky assets like stocks less attractive.
66. 2:50The thinking goes that if you can get a guaranteed 5% return
67. 2:54on an asset that's a lot like a savings account,
68. 2:57why take the risk on stocks?
69. 2:59And because most public companies have to borrow money
70. 3:02by issuing bonds, their costs will go up,
71. 3:04which often makes them less profitable.
72. 3:06This is especially true for so-called growth stocks.
73. 3:10These are usually tech companies
74. 3:11that have very high market valuations,
75. 3:13even though they don't make a lot of profit.
76. 3:15Tech has made up an increasingly large share
77. 3:18of the benchmark S&P 500 stock index
78. 3:20and is the backbone of the Nasdaq.
79. 3:23With the outlook for the economy uncertain,
80. 3:25you could see more investors
81. 3:26start to favor parking their money with the U.S. government
82. 3:29or leaving it in money market funds.
83. 3:32(gentle music)