Government Deficit and Stock Investors
There are times during which the government incurs higher expenses than its revenues. In such a case we observe a government deficit. This means that the government spends more than it gets from taxes and other types of income.
The question is: Is this government deficit good for stock investors or not?
In order to provide money for the incurred deficit, the government often issues US Treasury Bonds or it uses other borrowing instruments.
However, this technique has its negative effects on interest rates, since they increase as a result of the many borrowing instruments the government applies.
Government Deficit and Interest Rates
The raised interest rates are not beneficial for investors. As a result of the increased interest rates companies tend to increase the prices of their goods and services in order to adjust to the changes. However, this may lead to the infringement of companies' competitiveness.
Raised interest rates represent a financial burden to companies since they have to pay higher interest rates on the money they borrow for the execution of their activities.
To summarize, increased government deficit leads to increased interest rates, which in turn represents a burden on companies and potential damage to their competitive advantage.
Government Deficit: Good for the Economy?
On the other hand, increased government deficit may be viewed as a good thing if the borrowed money is used for the stimulation of the economy.
The history presents some examples in which the money the government has borrowed for the purpose of stimulating the economy has led to more job openings and capital investment funding.
The most outstanding example is the recovery from the great depression, which was done thanks to the excess borrowing of the government for the purpose of stimulating economic activity.
Government Deficit: Potential Investors' Response
Government deficit spending leads to increased interest rates. But, how can investors determine the effect of such a deficit on their investing?
Generally, companies borrow money in order to finance their future projects, such as expansions or acquisitions. The increased interest rates may greatly hamper their intentions.
So, if the government incurs high deficit, it is recommended that investors shift their investments to defensive stocks. In this way they can protect their assets from rising interest rates and their negative effects. A good example of defensive stocks is the different consumer staples, such as toothpaste.
Who can benefit from rising interest rates?
Investors that have large amounts of cash free for investing are the group of people that will potentially benefit from the increased interest rates. Their financial advantages can be greatly increased if they are willing and able to invest the money with a long-term focus.
Finally, government deficit does have an influence on investors. However, it can be difficult to determine the effect on the overall economy, so be cautious when the government starts to spend more than it actually gets.
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