Friday, October 14, 2011

2011 Budget Deficit Third One Over a Trillion Dollars

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

U.S. budget deficit figures released on Friday afternoon indicate that the deficit for fiscal year 2011 (ending on September 30th) came in at $1.3 trillion. This is slightly higher than the 2010 deficit and the third trillion dollar deficit in a row.

Total federal spending (on-budget items) came in at $3.6 trillion. Revenues were $1.3 trillion, over 4% higher than in fiscal year 2010. Revenue rose slightly to $2.3 trillion. As bad as the budget deficit appears (and a trillion dollar deficit is really extreme), the Congressional Budget Office estimated in January that the 2011 budget deficit would reach $1.5 trillion. The fight over raising the budget deficit ceiling postponed federal spending for a few months until a deal was reached in August however. It is likely that this spending will show up in the 2012 fiscal year.

While there is a special congressional committee looking for $1.5 trillion in savings, its actions are not going to reduce the total federal spending by enough to reduce the budget deficit to something manageable. The amount being cut is for a 10-year period and averages only $0.15 trillion per year. If this had been done last year, the 2011 budget deficit would have been $1.15 trillion — still an astronomical amount.

It is also safe to assume that the budget deficit in the next five years can easily grow much faster than the intended cuts. When they did their projections for future fiscal years, the Obama administration assumed that U.S. GDP would be growing by over 5% a year until 2016. While this figure was never plausible because it is much higher than the potential growth rate of the U.S. economy, now that the U.S. is facing a possible recession and negative GDP growth, it is even more absurd.

Investors should assume that a continual stream of major budget deficits awaits the U.S. in the future. At this point, the massive cutting that is necessary to get the budget under control will cause a hit to the economy resulting in lower tax revenues, which in turn will make the budget deficit worse, not better.  This is the downward spiral that Greece currently finds itself in. More cutting actually is leading to a higher debt to GDP ratio. The U.S. debt to GDP ratio is approaching 100%. Once this number is over 90%, a country's economy becomes permanently weakened. When it reaches 150%, and it will  for the U.S. if its budget deficits remain as large as they currently are, the probability of default becomes almost 100% certain.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.