US Budget Deficit: The One Stat of 2009

If there’s one batch of data that will embody 2009, this is it:

$1.4 trillion.

That’s the official budget deficit for the fiscal year 2009, which ended last week. According to Congressional Budget Office stats released late yesterday, the deficit is the highest in dollar amounts ever, more than triple last year’s record high. It’s 9.9% of our annual GDP, the highest since 1945. In short, our government is spending as if a war of superpowers were choking the world economy… though hardly a shot has been fired.

Combing through the fine details, Uncle Sam is guilty of the most basic accounting flub: He spent more and earned less. Outlays increased 18% from last year while government revenues crashed 17%.

Over 60% of the annual spending growth came from four sources: the Bush administration’s TARP, the Obama clan’s stimulus bill, Fannie Mae and Freddie Mac. No surprise there.

But this is shocking — to us anyway. Those extraordinary expenses are just as insane as our government’s ordinary spending, which is up across the board.

Social Security: $659 billion, up 8.6%
Medicare: $428 billion, up 9.8%
Medicaid: $251 billion, up 24%
War spending (oh, sorry, “Defense expenses”): $636 billion, up 7%.

The only area with significant declines were interest payments for public debt, down 23% from last year… only because we’ve monkeyed short-term interest rates to near zero.

And while the government puts the fiscal pedal to the metal, the average person continues to slam the brakes. Consumer credit fell for the seventh month in a row in August, the Fed admitted yesterday. Led by a 13% decrease in revolving credit (credit cards, mostly) total consumer borrowing excluding mortgages fell at a 5.8% annual rate, or $12 billion.

Total consumer credit has contracted seven months in a row only twice since the Fed started keeping track in 1943: This year and 1991. Since February, we’ve reduced credit lines by over $100 billion, more than 10 times the seven-month streak in 1991.

Heh, but lest we get too rosy on the fiscal prudence of John Q. Public… the total amount of American credit outstanding still exceeds $2.46 trillion.

“There’s still 100 times more consumer debt floating around than what’s been cut over the last seven months,” adds our currency trader Bill Jenkins. “Just keep in mind, we have a long, long way to go in order to erase this burden. And what little private debt is being eliminated is being overtaken by public debt. This is likely to be the case for several years into the foreseeable future — which is a strong deflationary factor.

“Prices fall because of demand. Demand begins with consumers who have coins jingling around in their pockets. If pockets full of money are not to be found, neither is demand.

“Debt has completely infused the American economy. When debt prohibits spending because consumers are out of cash or credit, deflation occurs.”

“Inflation cannot resume until more debt is purged from the system or until personal incomes rise to keep pace with increasing debt levels. At the present rate, it will be a long, long time before the public debt begins to be reduced. That means deflation for years to come.”

The Daily Reckoning