If you’ve turned your TV on in the last 20 years, you’ve heard pundits speak in dulcet tones about budget surpluses. According to them (as well as most media, investors—both amateur and professional—and almost everyone else), surpluses are the pinnacle of economic and market righteousness, whereas deficits are terrible. That drone has gotten louder in the last few years, in the US and abroad.
A surplus means the government collects more than it spends, and that’s morally and ethically responsible and good (allegedly). And because of all that responsibility, the economy should thrive and stocks rise. Conversely (according to this storyline), a deficit (meaning the government spends more than it takes in) is bad, and you don’t want to see any budget deficits if you can help it. And of course, bigger deficits are worse than smaller ones, but they all lead to more debt—which is reprehensible (see Bunk 45).

If Everyone Believes It, Ask If It’s True

Most folks believe this—uniformly. And when almost everyone you know believes something so dearly, you know that’s a great time to check if it’s true. Should you pray for surpluses? And will they bring great stock returns? How can we know? Simple: Through history, we’ve had big surpluses and big deficits before—many times. Just check when there have been big surpluses, and what stocks did after that—and vice versa. It’s easy—there’s massive free historical data on our nation’s budget and stock returns—and ...

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