Yet Another Record Budget Deficit for 2011

This morning Tim Geithner helped the White House unveil a $3.8 trillion government budget for the coming fiscal year. If approved, the fiscal year 2011, which starts in October, will ring in a record $1.6 trillion deficit.

Say again, $1.6 trillion. This is next year, mind you… Even the NBER will be convinced the recession is over by then. Whatever legitimate chance they had to spend under the guise of “emergency” or “the credit crisis” is long gone.

Part of the record deficit will come from an expected $100 billion “jobs bill.” Heck, since throwing money at the banks worked so well, why not? And those banks that we rescued? They’re getting hit with new punitive fees in hopes to make up for the votes lost in the past year of disappointing “change” in Washington.

But fear not, the increasing rate of spending will end NEXT fiscal year. The president’s budget office expects “just” a $1.3 trillion deficit for 2012. Really, it’s not so bad… the new projection is for $8.5 trillion in budget deficit over the next 10 years. That’s WAY better than the $9 trillion projected in August.

“Even if you assume both a rising US savings rate and generous foreign inflows to finance the federal deficit in 2010,” Dan Amoss writes, putting the federal budget into perspective for individual investors, “there remains a several hundred billion dollar shortfall in funding.

“The shortfall will be filled; it’s just a matter of price. Lower Treasury bond prices (higher yields) will attract more capital. This will raise the cost of debt for a global economy that depends on cheap financing. It’s also bearish for the stock market because rising Treasury yields will drive institutional fund managers to rebalance portfolios away from stocks and toward Treasuries.

“The move toward the relative safety of fixed income is already a strong long-term trend, and it could accelerate in 2010 if risk-free yields grow more tempting. Risk aversion has just started returning to most investors’ psyches; it has plenty of room to grow if it’s going to reflect the gloomy economic reality.”

The Daily Reckoning