Deficits Don't Matter to Stocks — Until They Do

The outlook for U.S. debt and deficits isn't pretty. The latest projections from the Congressional Budget Office are for $1 trillion annual budget shortfalls. On top of that, Treasury debt held by the public will almost double to $27.1 trillion over the next 10 years as the U.S. steps up its borrowing to finance the deficits. Perhaps the worst part is that there are no recessions built into these numbers, which would have surely shown debt eventually exceeding 100 percent of gross domestic product.

Here's the important point when it comes to markets: The literacy rate among investors is 100 percent. Everyone knows these numbers are essentially gamed, but no one seems particularly bothered. It's not as if there's widespread belief that the U.S. government will cut spending and/or dramatically increase taxes to reduce deficits. So we are left with the conclusion that investors believe there is no day of reckoning.