A Small Victory for the Budget Deficit

08/20/09 Baltimore, Maryland

Here’s a small victory, worthy of breaking out some Andre Brut:

The U.S. government budget deficit is more likely to ring in at $1.58 trillion this year, not the $1.84 trillion the Obama administration reported in May. According to some purposefully leaked budget projections due out next week, roughly $250 billion that was set aside in the 2009 budget for bank bailouts will not be used by October, the end of the fiscal year.

Of course, we’ll end up with an annual budget deficit of 11.2% of GDP, the highest since 1945 and an all-time high in dollar terms. But hey (they must be thinking), now we’ll have a little extra for that $1 trillion health care reform!

Back in our grammar school, team sports days, we’d say a game ending in a tie is “like kissing your sister.” Heh, this kind of budget “victory” feels the same, or worse (like your mother-in-law?).

“So far,” writes Bill Bonner, “this money has done nothing to relieve the underlying problem: The consumer has too much debt and too little income. The government can give him a tax rebate…or give him a check for a clunker. These giveaways will produce a temporary boost. But when the giveaways give way, there is nothing left. Does the guy who bought a car with government cash in 2009 buy another one in 2010? Does the fellow who brought his mortgage up to date with a tax rebate in 2008 go out and buy a new house in 2009?

“The problems are real… at the heart of the real economy. They are not problems that can be solved by monkeying with the money supply, interest rates or even fiscal policy. They are problems that need to be solved by the real economy… in the real economy… by consumers, who need to pay off their debts, and by businessmen, who need to adjust to the realities of the real world — adapting their capacity so as to produce things for people who can actually afford to buy them. It’s a long process… with many bankruptcies and disappointments along the way.

“That process has only just begun. It will deepen and get worse, as both consumers and businessmen realize that there will be no quick recovery… and no return to the old model — ever. Look for more layoffs… more foreclosures… more cutbacks and workouts.”

Ian Mathias

Ian Mathias is managing editor of The 5 Min. Forecast.  We discovered Ian working as a full time rock climbing guide and writing on the side. As it turns out, markets and global economics can be extreme too… at least enough to keep him around. Since working for Agora Financial, respected media outlets including Forbes.com, the Associated Press, Yahoo, and MSN Money have syndicated his writing. He received his BA from Loyola College in Maryland and is currently studying writing at the graduate level.

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