Deficits boost U.S. debt but also inflate corporate profits and stocks, so reducing red ink could trigger a financial crisis, analysts warn

Massive budget deficits have sent U.S. debt soaring past $38 trillion, but they have also become the primary driver of corporate profits and stock valuations, according to Research Affiliates.

In a recent note, Chris Brightman, who is a partner, senior advisor, and board member at the firm, and Alex Pickard, senior vice president for research, traced the historical trend between the deficit and how earnings are recycled to inflate asset prices.

“In the financialized U.S. economy...