There’s an old economic identity that most Wall Street analysts don’t talk about at cocktail parties. The Kalecki-Levy profit equation, named after economist Michal Kalecki and businessman Jerome Levy, says something deceptively simple: corporate profits are, in large part, a function of government deficits. The bigger the deficit, the fatter the bottom line.

That equation is now flashing some uncomfortable signals. The Congressional Budget Office projects a federal deficit of $1.9 trillion for fiscal year 2026, with that number ballooning to $3.1 trillion by 2036.

How deficits become profits

The Kalecki-Levy framework isn’t some fringe theory. It’s an accounting identity rooted in the national income accounts, emphasizing effective demand in the business cycle. When the government spends more than it collects in taxes, that money ends up somewhere. A lot of it ends up as corporate revenue.

This dynamic has been in play since the 2008 financial crisis, when fiscal backing for the economy intensified dramatically. The COVID-19 crisis cranked the dial even further, with trillions in stimulus flowing through the economy and landing, ultimately, on corporate income statements.

The trade-off nobody wants to talk about

The same deficits propping up corporate earnings are pushing US public debt toward alarming levels. Projections show debt reaching 101% of GDP by 2036.

A fiscal contraction could materialize as early as late 2026, particularly if midterm election dynamics shift political priorities toward austerity or tax reform. Any meaningful reduction in government spending would, by the logic of Kalecki-Levy, reduce the flow of money that ends up as earnings.

What this means for crypto investors

The Kalecki-Levy dynamic doesn’t stop at the stock market’s edge. It ripples directly into digital asset markets, where risk appetite and macro conditions have become increasingly intertwined.

Bitcoin, in particular, has developed a narrative as a hedge against the inflationary pressures that naturally accompany expansive fiscal policies. When governments run persistent deficits, they’re effectively diluting the value of future currency.

If and when fiscal tightening arrives, whether through spending cuts, tax increases, or some combination, the risk-on environment that has supported crypto valuations could reverse quickly. If fiscal contraction coincides with hawkish monetary policy, the double squeeze on liquidity could hit digital assets disproportionately hard.

Watching the CBO’s deficit projections and any post-midterm policy shifts should be near the top of every macro-aware investor’s checklist.