Thursday, February 26, 2009

Budget Deficit Screams Inflation

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The Obama administration released revised estimates for the 2009 budget deficit (the difference between the yearly income and spending of the federal government) today and it now looks like it will come in at $1.75 trillion. The original estimate for the 2009 deficit made by the Bush administration in February 2008 was $407 billion. Yes, the current estimate is now more than four times the original one... and we're not done yet. For a perspective of just how huge this number is, the largest U.S. budget deficit so far according to official figures was in 2004 and it was $413 billion. The current estimate represents over 12% of GDP (the overstated official number), approximately equal to the percentage in the World War II year 1942. As bad as a$1.75 trillion budget deficit is you can assume it is a gross underestimate of the actual number.

How the original 2009 budget deficit figure was obtained is not immediately clear. The Congressional Budget office estimated a deficit of $219 billion, which did not include the $168 billion stimulus plan passed early in the year. Adding those two numbers together, you would get $387 billion. Spending for the Iraq war was also not included in the number. If you use the current absurdly low estimate of only $170 billion that would bring the figure to $557 billion, not $407 billion (much Iraq war spending seems to somehow be kept magically out the budget). I frequently run into arithmetic problems such as these when looking at government reports. Nothing adds up correctly and the final number looks much better than what you should be getting from the component parts.

There were a few voices that were questioning the deficit numbers back in early 2008. Bill Gross from Pimpco warned that the budget deficit could rise to 5% of GDP and be as high as 600, 700, or even 800 billion dollars. We at the New York Investing meetup predicted that the first trillion dollar deficit would take place during the Bush administration. While this was considered an outrageous claim at that time, it was actually too low. As with much of the Credit Crisis, things have turned out to be even worse than the most dire outlook.

No one really knows what the actual budget deficit or national debt (the accumulated debt over time) is. Many items don't appear in either and this is not limited to Iraq war spending. Toward the end of last year, it was estimated that $8.5 trillion has been spent on trying to deal with the Credit Crisis. Most of that money is not included in the budget deficit or national debt. Future obligations for social security and medicare/medicaid are also ignored. Accounting for those could raise the national debt to the $50/$60 trillion level, if not more.

Where is the money coming from to pay for all of this spending? The major source is through 'printing'. While you can not print more and more of your currency and not have it devalue (the correct definition of inflation), this doesn't stop top economists such as Paul Krugman and Noriel Roubini from constantly opining in the media about the dangers of deflation. Just in case the 'experts' are misguided on this one, you might want to pick up some gold and silver during their current pull back. Oil, another inflation hedge, is also a great buy at the moment.

NEXT: Citi Dives, GDP Plunges - Both Off the Cliff

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.


Oct3 said...

In this economic environment, I’m not sure how it can help….

In the mean time, I just came across a very helpful website on the current economic downturn and employment:

Nexpider said...

The dollar is now worth $0.89 to the Canadian loonie. This is an exact reverse of the dollar/loonie dynamic whereby the US dollar is stronger than the loonie. Canada is one of our major export/import business relations. This huge trade dynamic is seldom mentioned in the US media. It is as if Canada is invisible. If energy prices continue to climb due to this currency differential, we are in deep trouble.

Ralph said...

Paul Krugman and Noriel Roubini are right: a large money printing operation in a recession won’t be inflationary. However come the upturn, much of this new money will have to be reined in, and if it is not, inflation may get out of hand.

Re figures for money supply, deficit, etc, this may be of help. Go to:
Scroll down to near the bottom and click on “financial data” link under “12”.