President Barack Obama today will send to the US Congress a budget with a record $1.6tn (£1tn) deficit, as he boosts spending on job creation, his healthcare overhaul and defence while ending Bush-era tax cuts for wealthy Americans.
The budget deficit is the largest ever in dollars, and at 10.6% of US gross domestic product it is the largest proportionally since 1945, when the the war-time US ran a budget deficit of 21.4% of the economy.
A 1.6 trillion dollar projected deficit for FY 2011. Thats four times larger than the projected deficit in George W. Bush's last annual budget proposal.
Not to worry. The same folks who told us last year that the way to avoid national bankruptcy is to spend more money tell us now that the way to save money is...to spend more money:
The proposed budget assumes increases in revenues from cap-and-trade legislation--which will never pass the Senate--and from elimination of the Bush tax cuts--which may never pass either the House or Senate. It also assumes that Congress will pass Obama's punitive banking tax, which is not at all certain.
The budget also assumes federal tax revenues and interest payments on the national debt will reflect current economic conditions, which are pretty shaky already. If the economy enters into an inflationary recession or depression--not outside the realm of possibility--expect federal tax revenues to plummet and interest on the national debt to rise significantly. The budget proposal is a train wreck under the most optimistic assumptions and a national disaster under the more plausible ones.
The president's proposed budget document--like those of all presidents- -was dead on arrival in Congress almost from the day it was announced. Democrats are already balking at its fiscal irresponsibility (see below). But as an indication of an administration's political and fiscal priorities budgets are a window into the civic morality of our leaders. This deceptive and cynical budget proposal tells us much about this president, and none of it is good.
Obama’s budget assumptions, which by law must project out 10 years, would result in almost $50 trillion in new outlays and combined additional deficits of $9 trillion. By 2020 the national debt would total over $20 trillion, exceeding 1o0% of projected GDP in that year. Experts acknowledge that once cumulative fiscal deficits total 75% or more of national GDP, nations have almost no recourse but to declare national bankruptcy.
Pundits and economists of both the left and right acknowledge that our cumulative deficits are a looming national catastrophe. Last year, The Washington Post’s Robert Samuelson--no conservative --warned that Obama’s spending plans (he was discussing Obama’s 2010 budget proposal) augured a future fiscal crisis. Samuelson wrote: “The Obama budgets flirt with deferred distress, though we can't know what form it might take or when it might occur. Present gain comes with the risk of future pain. As the present economic crisis shows, imprudent policies ultimately backfire, even if the reversal's timing and nature are unpredictable.”
That was then. Things have only gotten worse, given that last year’s budget--the one Samuelson was analyzing--projected a 10-year deficit of $7 trillion and this year’s projects a 10-year deficit of $9 trillion. Thats a 30% increase in projected deficits year over year.
Gerald Seib of the Wall Street Journal--a moderate to liberal commentator--concedes that the budget deficit has “graduated from a nuisance to a headache to a pressing national concern.” He goes so far as to deem it a national security threat, in that half our accumulated debt is owned by foreigners, many of whom aren’t interested in our welfare. Dangers abound--from China and foreign central banks who “could put pressure on the U.S. in a way that no military could” to a run on the dollar by foreign investors who suddenly lose confidence in the currency.
The New York Times--which by the way applauded Obama’s budget proposal--sort of concedes that fiscal deficits are a problem. But one that can wait, apparently. The Times admonishes Congress to not “waste any more time posturing about the deficit rather than doing what is needed to get Americans back to work.”
Many in Congress aren't listening to The Times, it would seem. Even Democrats--fresh from the wake up call of Massachusetts-- are spooked by Obama’s budget nightmare. When Peter Orszag, Obama’s budget director, testified at Capitol Hill yesterday, lawmakers of both parties took him to task over the administration’s joke of a deficit reduction plan. Senator Kent Conrad--a Democrat from North Dakota and Chair of the Senate Budget Committee--went so far as to declare that "the president's 10-year-outlook is not a path we can take.”
Obama's budget--probably willfully--sets the stage for a massive tax increase even beyond the repeal of the Bush tax cuts. But crushing new taxes will only reduce the pool of income producers who can be taxed to finance even the interest on the debt, much less to payoff the debt itself. That leaves only two options: Reduce spending to match revenues, which isn’t going to happen; or borrow the difference between outlays and income from domestic and foreign lenders.
The problem is that half of our debt--about $6 trillion-- is owned by foreign lenders. At some point they will conclude that the U.S. has no intention of putting its fiscal house in order. At some point thereafter they will avoid U.S. Treasuries and agency issues like the plague.
Enter then the third option, which is no option at all, but a fiscal imperative: run the printing presses. When the creditors balk at lending the Federal Reserve must raise short-term interest rates to attract them. But if they lose confidence in the dollar, even interest-rate premiums won't help. The Fed must then “monetize” the debt; that is, buy the bonds that no one else will.
In essence, the Fed will have no choice but to inflate the dollar by increasing its supply, thus lowering its value. This is tantamount to stealing wealth from the American people and a stealth default on our obligations to foreigners. This is the kind of scenario that results in trade wars--and shooting wars.
Barack Obama and most Democrats in Congress may be long gone by the time all this plays itself out, but that doesn't fully explain their willingness to subject this and future generations to the prospect of becoming the world's economic pariah. While both parties have contributed to our fiscal straits, the fact is that our fiscal nightmare accelerated once Democrats re-took control of the country's purse strings in 2007. Now they seem hell-bent on crushing any prospect for reversing course, preferring instead to pass an unpopular and divisive agenda.
There is something tragically, pathologically wrong with political leaders who would sacrifice the prosperity and economic well-being of its citizens for political and ideological ends. We can only speculate as to what it is that drives such men and women to put its citizens at risk. At times like this, political wisdom is not sufficient to address what increasingly looks like a psychiatric problem.
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