The US deficit is close to 100% of GDP (click on the graph to enlarge it). Everybody is screaming because they predict soaring inflation.
Nonsense. Nonsense. Nonsense.
Italy's deficit is 115% of GDP and inflation is plunging below 2%. Japan's deficit is 157% of GDP and they are deep into deflationary times. So, what is all this screaming about the dangers of deficits? OK, this is the way I see it. It is not the first time I have stated my views on this subject.
The deficit of a country measures the transfer of wealth from us -- the populace -- to the bondholders -- the investors financing our debt. The government is just an intermediary. The government makes sure we pay the bondholders.
The outcome is that we get poorer and the bondholders amass a huge amount of wealth -- our money. As we get poorer we can afford fewer and fewer things. Demand for goods and services declines. Houses get smaller. Cars become more efficient and tiny. We learn to live with less. Prices decline. Inflation disappears and deflation is a strong possibility because we can afford less and less.
This is exaclty what is happening now. And we have no escape. The bondholders own us. As a bank owns us when we borrow excessively.
The dollar has little to do with this process. A currency strengthens when investors see opportunities in a country. The dollar will strengthen if we offer profit opportunities. It will weaken if the government strangles business with taxes and regulations.
To find out more about my in depth view of the markets and my strategy just visit our website https://www.peterdag.com/ where you can review The Peter Dag Portfolio. You can also call me at 1-800-833-2782 to discuss your specific money management needs.
I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.
George Dagnino, PhD
Editor, since 1977
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