CBO Says White House Budget Deficit Projection Too Low

The record budget deficit may be even larger over the next decade than originally projected by the Obama Administration. While the citizenry of the country is concerned about its impact, the bond market has not yet expressed a clear opinion on the long-term effects of the large quantity of debt that the government has taken on, and on how that debt should be priced in the future. See the following post from The Capital Spectator.

It's all about deficits these days. The challenge is figuring out what it all means for the markets, the economy, the man on the street and for politics in Washington. What's crystal clear at the moment is that there's a bull market in red ink. That's hardly a surprise, although the debt estimates continue to creep higher. That latest example comes from the Congressional Budget Office, which published a new analysis on Friday of President Obama's budget outlook. The CBO concludes that the projected deficit for the decade ahead will be $1.2 trillion more than the White House predicts.

The reaction from the Republicans is predictable. "The news today from CBO is clear: The president’s budget will continue to lead our nation into a fiscal catastrophe—an ever worse one than the president’s own numbers suggest," says Paul Ryan (R-Wisconsin), a Republican on the House Budget Committee, via BusinessWeek.

The White House begs to differ, of course, arguing that it's making the best of a bad situation. "That is why even as we increased our short-term deficit to rescue the economy, we have refused to go along with business as usual, taking responsibility for every dollar we spend, eliminating what we don’t need, and making the programs we do need more efficient," the administration's Office of Management and Budget asserted when it released its forecast last month.

Perhaps the question is whether the budget plans are too heavily focused on spending, or weak on raising sufficient revenue to pay for the plans. The answer depends on your perspective. Consider this excerpt from CNNMoney.com:

The CBO cited two big contributors to the jump in debt.

One is the president's proposal to extend the 2001 and 2003 tax cuts for the majority of Americans. The other is the proposal to protect middle- and upper-middle-income families from having to pay the Alternative Minimum Tax (AMT).

Together those proposals would cost $3 trillion between 2011 and 2020.

"It points out the unwillingness of the administration to raise the revenues to pay for the size of government being proposed," said Robert Bixby, executive director of the Concord Coalition, a deficit watchdog group.

Is the Obama administration a victim of its own optimism? Not necessarily, says Jim Horney of the Center on Budget and Policy Priorities. "It's not that the administration has a rosy scenario, but the CBO is a little less optimistic about income growth," he tells The Hill.

Regardless of one's political views, the rising level of debt is affecting the public's attitude. "More than twice as many U.S. adults (58%) say that debt owed to China is a more serious threat to the long-term security and well-being of the U.S than is terrorism from radical Islamic terrorists (27%)," according to a new a new Zogby poll. What's more, there was little variation by political affiliation. Democrats, Republicans and independents were in agreement by a wide margin that debt was the number-one threat.

The big question is when (if) the bond market's views will change. The benchmark 10-year Treasury remains in the upper 3% range, where it's been since last summer.

The muted outlook on economic recovery is one reason. But the real issue is deciding how long the fixed-income set will stay calm and give the government the benefit of the doubt. There's a compelling argument for thinking that the price of money should stay low in a time of diminished expectations. Unfortunately, that's just an assumption and it's not clear that it's written in stone.

This article has been republished from James Picerno's blog, The Capital Spectator.

Should Obama Be Blamed For The Record Deficit?

Glenn Hall from The Street argues that the blame for the record budget deficit of $1.56 trillion in 2010 should fall to both the democrats and republicans. While Obama will shoulder a lot of the blame for the record deficit, much of the spending is an extension of actions were initiated before he took office. See the following post from The Street.

President Barack Obama sent his proposed $3.83 trillion budget to Congress today, showing deficit spending that goes well beyond the levels set by the previous administration of President George W. Bush.

The Obama budget shows the government spending $1.56 trillion more than it earns from taxes, an increase from $1.4 trillion in 2009. The new deficit projection would be 10.6% of GDP -- almost double the level during the Reagan years.

This will stoke a lot of heated debate about policy choices, stimulus spending, banking bailouts and pork-barrel politics. In large measure, the blame will fall on Obama. This is already being labeled as Obama's deficit (just like it was Bush's deficit before).

The reality is that this is everyone's deficit.

The budget will include billions of dollars to fund the ongoing war efforts in Afghanistan and Iraq -- wars that were started by the previous administration and gladly financed by the Republicans in Congress during their period of control. It will also include the costs of the banking bailout, also initiated under the previous regime but expanded by Obama. And the budget includes stimulus spending that both parties of Congress quickly passed amid the panic of the financial collapse and economic downturn when Obama took office a year ago.

While I'm not inclined to be Obama's apologist, I think we have to recognize that he's only been in office for one year and it took much longer than that for this deficit to grow to this historic level.

That said, Obama's new-found religion about reining in government excess is just words at this point. He's starting to preach but is he practicing? In the state of the union address, Obama said belt-tightening will be needed - just not this year because of the need to create jobs and nurture an economic recovery that remains tentative.

Obama didn't mention the mid-term elections coming up, but it must be on his mind. He can't afford to lose any more Democratic allies in Congress after Republican Scott Brown broke the Democrat's filibuster-proof majority in the Senate when he won the special election to replace the late Democratic icon Ted Kennedy.

We've seen Obama embracing the populist rhetoric with his vilification of the big banks and the big bonuses paid out by the likes of Goldman Sachs (GS Quote), JPMorgan Chase (JPM Quote) and yes, even Citigroup (C Quote). Tapping into that anger may help overcome the growing Republican focus on the deficit as the election rallying point for their party -- at least as far as the tea party faction is concerned.

It will be easy to pan the Obama budget, but the inconvenient truth is that this is more than Obama's problem - it is our nation's problem and both Republicans and Democrats share in the blame and the responsibility for fixing it.

This post has been republished from The Street.

Excessive Debt: A Destroyer Of Great Nations

Moses Kim writes that news of an economic recovery is nothing more than propaganda to distract people from the government destroying the economy with debt. With a record budget deficit for the month of October that included a $17.93 billion payout for interest alone, the national debt continues to spiral out of control. See the following from Expected Returns.

Forget all the hoopla you hear from the mainstream media and focus on reality. We are far, far away from any sustainable recovery. With tax receipts collapsing, and American businesses and consumers on life support, there is really nothing our government can do to stop this economic collapse. Of course that won't stop our clueless officials from trying, and in the process of doing so, destroying the dollar. From the WSJ, U.S. posts $176.6 Billion Deficit for October:

The federal government kicked off fiscal year 2010 by posting its widest-ever October budget deficit, the Treasury Department said Thursday.

The $176.36 billion gap is more than $20 billion wider than the shortfall recorded in October 2008, driven up by lower tax receipts, stimulus-related revenue reductions and consistently high government outlays.

Treasury's monthly budget statement shows receipts were $135.33 billion in October, down 18% from a year earlier and at the lowest level since October 2002. Meanwhile, outlays were $311.69 billion, down 3% from a year earlier and at their second-highest monthly level on record.

So much for "green shoots"- our budget shortfall is already well-beyond crisis levels. The budget deficit in October would have been the equivalent of the annual budget deficit a mere decade ago. Even with all this government stimulus, is unemployment improving? Are new businesses opening? Sans government propaganda, does anyone really "feel" that this recession/depression is actually over?
Debt Reduces Productive Capacity

At the equivalent of 9.9% of gross domestic product, the figure is the widest U.S. deficit as a share of GDP since 1945.

The government paid $17.93 billion in net interest last month on the federal debt. Net interest on the federal debt excludes interest paid on nonmarketable government securities held by federal trust funds, such as Social Security.

The only ways to make up for shortfalls in tax receipts are through higher taxes, debt issuance, or inflation. Study your history books and see that excessive debt has always destroyed great nations. Governments throughout history have taken on the responsibility of trying to "fix" debt crises, and have succeeded only in making the problem worse.

We are experiencing a debt crisis in all sectors of the economy. Overleveraged individuals are being gouged by credit card companies, which means that there is no more money left to organically stimulate the economy and create real jobs. Banks are overleveraged, which means their primary focus will not be to lend to consumers, but to repair capital ratios. And then you have the U.S. government- the most overleveraged entity in the world. There is no doubt in my mind that the cascading effect of debt defaults- from states and municipalities, to individuals and the federal government itself- will wreak utter havoc on our economy.

All of our potential productive capacity is being wasted to service our exponentially growing debt. You just don't solve a debt problem by blindly throwing money here and there, and getting deeper and deeper into debt. It's been tried before in Japan, and that experiment has failed magnificently. It's a sad fact, but our country is being destroyed before your very eyes.

This post has been republished from Moses Kim's blog, Expected Returns.