The Deficit and Your Portfolio

Do deficits matter? The question is too important to be left to economists and politicians. There's nothing more important to investors and workers than the size and direction of interest rates over the next 10 years.

Nothing has more power to turn an intelligent decision on what assets to own in a portfolio into a disaster. And nothing else makes putting together a portfolio right now so uncertain and so risky.

Unfortunately, the answer to the question is, "It depends." It depends on the size, duration and cause of the deficit. Looking at these three factors, I believe, will tell investors whether they should breathe a sigh of relief or head for the hills.

How Big Is the Deficit?

This exercise would be a lot simpler if everyone agreed on the size of the deficit, but they don't. Accounting tricks and political games make the number elusive at best. But we have to start somewhere, and I suggest the budget President Bush submitted to Congress for the 2004 fiscal year that begins in October 2003.

Deficit for fiscal 2004: $307 billion

Deficit for fiscal 2005: $208 billion

Deficit for fiscal 2006: $201 billion

Deficit for fiscal 2007: $178 billion

Deficit for fiscal 2008: $190 billion

Total deficit for 2004-2008: $1.1 trillion

But those numbers actually measure what's called the off-budget deficit. They include the surpluses that are currently being piled up by the Social Security trust fund as baby boomers at the height of their earning power put more into the fund through taxes than they take out in benefits.

Take those surpluses out of the budget figures and the deficit numbers are almost twice as high:

Deficit for fiscal 2004: $482 billion

Deficit for fiscal 2005: $407 billion

Deficit for fiscal 2006: $412 billion

Deficit for fiscal 2007: $406 billion

Deficit for fiscal 2008: $433 billion

Total deficit for 2004-2008: $2.1 trillion