Public Debt, Inflation and the Stock Market

When the U.S. government runs substantial deficits, some experts proclaim the dollar’s inevitable inflationary debasement and bad times for stocks. Other experts say that deficits are no cause for alarm, because the country can bear more debt. Politicians argue about reducing spending and/or increasing taxes to reduce the deficit. Does a large federal deficit (increase in public debt) spur inflation and drive down stock prices? Using annual (end of fiscal year) figures for the level of the U.S. public debt from the Bureau of the Public Debt and contemporaneous Dow Jones Industrial Average (DJIA) and inflation rate data over the period June 1929 through September 2010 (about 81 years), we find that: (more…)