It might actually be true that the U.S. budget deficit is the key ingredient in the current economic expansion, and without it the economy would fail. Heresy, perhaps, but possible, since the deficit puts extra cash into the economy, and as long as the debt is affordable, the good times will keep rolling.

When you look at the economy, it begs the question: what is keeping it so strong? Labor demand is weakening. Inflation continues to run far above target. The Fed is raising rates, which usually slows an economy. Yet stock market earnings are near-record strong. What gives?

The answer is the big, bad deficit. Fiscal stimulus is growing the economy faster than it would with a balanced budget. The extra cash raised by the debt funds additional goods and services, such as healthcare, the military, social services, and government jobs, that wouldn't be affordable without borrowing. This applies to any debt, public or private. How many homeowners would be in their homes if no mortgages were available?

In fact, the deficit is actually making itself more affordable. By causing higher interest rates than most other G7 nations, it makes our debt more attractive. Investors in our debt get paid more yet have the full faith and credit of the United States behind their investments.

Also, the dollar continues to strengthen given the “carry trade.” Investors can buy our debt and borrow in other currencies at lower interest rates, and watch our debt and dollar value increase, earning profits for their risk. The deficit, therefore, is good for our currency, which makes our debt more attractive and gives the US more borrowing power. It is self-sustaining.

On and on it has gone since the 1980’s. And so long as the US can afford it, it will continue. The question is whether this financial high-wire act can be maintained. At some point, the debt becomes too heavy for the economy to support. So the earnings need to keep growing. Consumers need to keep spending. Wages need to keep increasing. The stock market needs to keep setting records. Inflation needs to remain high, so the Fed keeps tightening.

Round and round she goes… where she stops, nobody knows…