Some disadvantages of a skyrocketing deficit, under normal circumstances, might include higher prices and higher taxes. However, today governmental stimulus packages and protective intervention are aiming to offset other negatives.
"The current government focus is to increase the deficit in an effort to create more jobs, improve infrastructure, and shore up the nation's financial system," says Bob Allsbrook, CFA, chief economist for Regions. "The government's approach is that we will do what we have to do now and deal later with the consequences of a large deficit. That's the trade-off they're making."
Soaring Interest
The rising deficit may not lift all boats, but eventually it likely will raise interest rates. A high interest rate is usually perceived as a negative economic indicator, since it's seen to inhibit the economic activity necessary to break out of slow growth periods. However, this is where one area where conventional wisdom can be somewhat deceiving.
There is a silver lining to soaring interest rates, especially for average Americans who tend to follow conservative to moderate investment strategies that look to cash-equivalent products—such as CDs or money markets—that have returns tied to fixed or variable interest rates.
"Any shift in economic policy is going to have advantages and disadvantages. We're going to see deficit levels on a scale we haven't seen since World War II," says Allsbrook. "It's human nature to focus more on potential problems, but we should also look at the potential opportunities."
Allsbrook says neither he, nor anyone else, can predict exactly how high interest rates will rise, but believes the initial climb will start soon.
"It's impossible to pinpoint exactly when the rates will go up, but it could start later this year," says Allsbrook. "About the only thing we know for sure is that the rates will go up eventually."
As for how high the deficit will reach, Allsbrook says it could go as high as $2 trillion in a relatively short amount of time. America has never before seen the deficit increase that much, that quickly.
So, what should Americans do—or not do—during these turbulent economic times? "We all need to sit down and figure out what financial standing, in each of our unique cases, allows us to sleep well at night," Allsbrook says. "The details of this goal are different for everyone."