by Calculated Risk on 1/25/2010 07:56:00 PM

From McClatchy Newspapers: Officials: Obama will propose three-year spending freeze

President Barack Obama will propose a three-year freeze in non-security discretionary spending, senior administration officials said Monday.

His budget proposal, to be unveiled in part with Wednesday's State of the Union speech and in detail next week, will urge Congress to keep overall spending at $447 billion a year for agencies other than those charged with national security and mandatory-spending programs such as Social Security and Medicare.

The freeze would take effect with the 2011 fiscal year starting Oct. 1 ...

It also wouldn't affect a 154 billion [dollar] jobs plan pending before Congress and backed by Obama, the officials said. One aide said that plan would be exempt because it would take effect this year, before the freeze.

Administration officials, who spoke on the condition of anonymity to not upstage the president, said that the three-year freeze would save $250 billion over a decade — if it's approved by an election-year Congress.

After three years, the total spent would be the lowest as a percentage of the total economy in 50 years. Spending on those agencies has increased by an average of 5 percent a year since 1993, the officials said.

This is an important issue, but I'd rather wait to address the deficit until after we see clear signs of a recovery.

Note: I have a long history of being a deficit hawk, but I don't want to see a repeat of the mistakes of 1937, see: A comment on the Deficit and National Debt

by Calculated Risk on 3/11/2009 03:04:00 PM

From Rex Nutting at MarketWatch: Budget deficit widens 10% as receipts fall to 14-year low

U.S. federal government budget widened to $192.8 billion in February ... the second largest monthly deficit on record ... receipts dropped 17% to $87.3 billion, the lowest since February 1995.

In February, individual income taxes fell 64% to just $8.7 billion. That's the lowest monthly total for individual income taxes since May 1985.

Ouch!

by Calculated Risk on 2/21/2009 04:07:00 PM

From the WaPo: Obama to Unveil an Ambitious Budget Plan

Even before Congress approved the stimulus package earlier this month, this year's deficit was projected by Congressional budget analysts to approach $1.2 trillion, or 8.3 percent of the overall economy, the highest since World War II. With the stimulus and other expenses, some analysts say the annual gap between federal spending and income could approach $2 trillion when the fiscal year ends in September.

Obama proposes to dramatically reduce those numbers by the end of his first term, cutting the deficit he inherited in half, said administration officials, speaking on condition of anonymity because the budget has yet to be released. His budget plan would keep the deficit hovering near $1 trillion in 2010 and 2011, but shows it dropping to $533 billion in 2013 -- still high in dollar terms, but a more manageable 3 percent of the overall economy.

To get there, Obama proposes to cut spending and raise taxes. The savings would come primarily from "winding down the war" in Iraq, ... Obama also seeks to increase tax collections, primarily by making good on his promise to eliminate the temporary tax cuts enacted in 2001 and 2003 for wealthy taxpayers ...

Obama also proposes to maintain the tax on estates worth more than $3.5 million, instead of letting it expire next year.

For several years I've complained about the Bush structural budget deficit, and the lack of fiscal flexibility once the inevitable housing bust arrived. Now that the bust is here, we are seeing the full impact of that flawed fiscal policy. Ouch.

A $2 trillion annual budget deficit is possible. And even after the U.S. economy bottoms (it will happen someday), the recovery will probably be very sluggish, keeping the deficit extremely high for years. I doubt that the the budget deficit will be cut to $533 billion in fiscal 2013.

by Calculated Risk on 2/11/2009 02:06:00 PM

From MarketWatch: U.S. Jan. budget deficit $84.0 bln vs $17.8 surplus yr-ago

The government reported a deficit of $84.0 billion in January ... [compared to] a surplus of $17.84 billion in the same month one year ago. Lower corporate taxes are dragging receipts lower, while spending has jumped ... Experts are forecasting a deficit above $1.6 trillion in the fiscal year ending Sept. 30

The CBO was projecting a deficit of $1.2 trillion before the Obama stimulus plan:

As for the startling [$1.2 trillion] estimate from the nonpartisan Congressional Budget Office, if it proves accurate, the budget deficit will be nearly two and a half times bigger than the previous record shortfall of $455 billion reached in 2008.

The estimate was far higher than most other analysts have predicted. If combined with the gigantic stimulus package of tax cuts and new spending that Mr. Obama is preparing, which could amount to nearly $800 billion over two years, the shortfall this year could hit $1.6 trillion.

And it is important to note that this is the unified budget deficit that includes the significant Social Security Insurance surplus. The General Fund deficit will be even worse.

by Calculated Risk on 1/21/2009 06:23:00 PM

From Northern Trust Chief Economist Paul Kasriel: DUBYA

No, our title does not refer to our 43rd president. Rather, it refers to the shape of an economic scenario that is beginning to look to us as the most probable going forward. The current economic environment is indeed bleak and there are precious few signs of a recovery. But we believe that if the massive fiscal stimulus package being worked up in Congress is financed largely by the banking system and the Federal Reserve, there is a good chance the economy will begin to grow by the fourth quarter of this year and continue to do so throughout 2010. And if we are correct on this, we also believe there is a good chance that the consumer price index will be advancing at a fast enough pace by the second half of 2010 to induce the Federal Reserve to become more aggressive in draining credit from the financial system. This could set the stage for another recession commencing in 2012, or perhaps some time in 2011. So, the shape of the path of economic activity we see over the next few years is not a “V”, a “U”, or an “L”, but a “W” – down, up, down, up, all within four or five years.

I think there is a good chance that the stimulus package will lead to positive GDP growth later this year (although we still need to see the details) . Northern Trust is forecasting positive GDP growth in Q4 2009.

[W]hat is our rationale for a late-2009 economic recovery and a subsequent 2011 or 2012 slowdown/downturn? Massive federal spending funded by the Federal Reserve and the banking system. The Obama administration and Congress are in the process of developing a two-year fiscal stimulus package that at last, but likely not the final, count totals $825 billion. This fiscal stimulus program will include all things to all people – traditional and non-traditional infrastructure spending, aid to state and local governments, expansion of food stamp and unemployment insurance programs, and tax cuts for households and businesses. This massive federal spending and tax cut program will be financed by issuing additional federal debt. Who is likely to purchase this debt? The Federal Reserve and the banking system.

This is an interesting suggestion. I've been concerned about rising rates because of the huge financing needs of the U.S. government. Kasriel is suggesting this debt will be bought by the Federal Reserve to keep rates down.

The implication of the banking system and the Federal Reserve monetizing large proportions of nonfinancial sector borrowing – government or private sector – is that the borrowers are able to increase their spending without any other entity cutting back on its spending. Thus, in terms of the GDP accounts, total spending in the economy increases. This is why we expect a recovery in real GDP by the fourth quarter of this year.

If monetizing nonfinancial debt were costless, economically speaking, the Zimbabwean economy would be the envy of the world. But, of course, there are economic costs. Monetizing debt means printing money. And printing money ultimately leads to accelerating prices – prices of goods, services and assets.
...
If we are correct that a real GDP recovery commences by the fourth quarter of this year, then we believe the Federal Reserve will cautiously begin slowing its credit creation in the first half of 2010 – that is, the Fed will begin to slowly increase the federal funds rate. We then see inflationary pressures intensifying in the second half of 2010 and the Fed reacting to this with more aggressive hikes in the federal funds rate. This is what we believe will trigger the next official recession, or at least, growth recession.

In conclusion, over much of 2009, the year-over-year change in the CPI is likely to be negative. We advise investors not to extrapolate this “deflation” into 2010 and 2011. With the massive monetization of debt that is likely to occur, increases in the CPI are expected to resume.

It is amazing how people are swinging from fears of inflation to fears of deflation to fears of inflation again.

by Calculated Risk on 12/10/2008 09:30:00 PM

Four years ago I predicted the Total Public Debt Outstanding would reach $10 trillion by the time Mr. Bush left office in Jan 2009. I jokingly called him the "$10 trillion man".

I was too optimistic.

The Total Public Debt Outstanding is now over $10.6 trillion. And the budget deficit has grown significantly.

From MarketWatch: U.S. Nov. budget deficit $164.4 bln vs $98.2 bln yr-ago

The U.S. federal government deficit soared again in November to $164.4 billion, the Treasury Department reported Wednesday. This is a record shortfall for the month of November.

Click on graph for larger image in new window.

This graph shows the public debt outstanding since the beginning of 1993 (the start of the available data from the Treasury site).

There was a clear trajectory change starting in late 2001, and then a huge amount of borrowing this year due to the credit crisis (hopefully some of this money will be returned).

The second graph shows the same data, but on a year-over-year basis. This clearly shows the two problems: 1) the Bush structural budget deficit, and 2) the heavy borrowing due to the credit crisis.

Even after the credit crisis is over, the U.S. will still have to address the ill-conceived Bush structural budget deficit (a much larger fiscal problem than any Social Security Insurance shortfall, and about the same size as the Medicare shortfall).

As long as the economy is in a recession, the budget deficit will be ignored. But some day this will an issue again ... and the numbers will be huge. See this story from Bloomberg: Treasuries Fall as U.S. Says Borrowing May Reach $2 Trillion

Yields climbed after Treasury Assistant Secretary Karthik Ramanathan, in a speech in New York, cited private analysts’ estimates of borrowing needs that may reach as much as $2 trillion in the financial year that ends in September 2009.

A trillion here, a trillion there ...

by Calculated Risk on 11/03/2008 05:45:00 PM

It seems like just yesterday that the National Debt exceeded $10 trillion for the first time. Hard to believe that was just one month ago since the National Debt is now $10.574 trillion (yes, an increase of $574 billion in about one month).

This raises questions about funding the debt. From Bloomberg: U.S. to Borrow Record This Quarter to Finance Deficit

The U.S. Treasury more than tripled its planned debt sales for this quarter to help finance a 2009 budget deficit that bond dealers advising the department estimate may swell to almost $1 trillion.

Borrowing needs are expected to rise to $550 billion in the three months to Dec. 31, compared with the $142 billion predicted in July, the Treasury said in a statement in Washington. That follows a $530 billion record in the July-September quarter.

As I noted over the weekend, these huge financing needs combined with foreign governments need to stimulate their domestic economies (and maybe even selling foreign reserves) could lead to higher intermediate to long term rates in the U.S. next year - right in the middle of a recession.

by Calculated Risk on 9/29/2008 05:27:00 PM

Several years ago I predicted that the National Debt would reach $10 trillion by the time President Bush left office. For a short period (thanks to the housing bubble), it looked like the deficit would be less than I projected.

Back in March, with the housing bust starting to hit government revenues, it started looking like the $10 trillion projection had a chance.

Click on graph for larger image in new window.

This graph shows the daily National Debt from TreasuryDirect). Note that the y-axis doesn't start at zero to better show the change.

Here is an update: The National debt is $9.889 trillion as of Sept 26, 2008. That leaves the debt just over $110 billion short of my projection with almost 4 months to go.

Over the last month, from August 26th to Sept 26th, the National Debt has increased $254 billion as the recession has started to significantly impact government revenues. It looks like $10 trillion will be passed very soon.

Also, the National Debt has increased a stunning $895 billion over the last 12 months (from Sept 26, 2007 to Sept 26, 2008). Shocking.

by Calculated Risk on 9/22/2008 06:48:00 PM

Several years ago I predicted that the National Debt would reach $10 trillion by the time President Bush left office. For a short period (thanks to the housing bubble), it looked like the deficit would be less than I projected.

Back in March, with the housing bust starting to hit government revenues, it started looking like the $10 trillion projection had a chance.

So here is an update: The current National debt is $9.727 trillion (see TreasuryDirect) as of Sept 19, 2008. That leaves the debt about $273 billion short of my projection with 4 months to go.

Last year, from Sept 19, 2007 to Jan 20, 2008, the debt increased $185 billion. That is not quite a fast enough pace to make $10 Trillion by next January. But the debt is accumulating much faster this year.

Over the last month, the National Debt has increased $112 billion compared to $34 billion for the same period last year. At this rate, the National Debt will blow by $10 trillion before Bush leaves office.

Add in the Paulson plan, and it's not even going to be close.

by Calculated Risk on 9/09/2008 12:13:00 PM

From MarketWatch: Federal budget deficit to remain near $400 billion, CBO says

With the economy weakening and spending on the war rising, the federal government's budget deficit is expected to more than double this year compared with last year, the Congressional Budget Office estimated Tuesday. The federal deficit is projected to hit $407 billion in the fiscal year that ends Sept. 30 ...

The assumptions in the CBO report are very optimistic, and the structural budget deficit will likely be worse than their forecast.

Also, to be accurate, this is the Unified Budget deficit. The General Fund deficit (the responsibility of the President) will be over $600 billion this year. This will put the National Debt close to $10 Trillion when the next President takes office in January 2009 (not counting any impact from the Paulson Plan for Fannie and Freddie).

What ever happened to that Joshua B. Bolten guy? (Yes, I know he is now Chief of Staff). Bolten kept telling us the budget deficit would be cut in half by the time President Bush left office.

We have arrived at this point largely because of this President’s and this Congress’ pro-growth policies, especially tax relief. Those policies have strengthened the economy, which is now producing better-than-expected tax revenues.
Joshua B. Bolten, July 2005

That statement was never accurate. Tax revenues increased in 2005 primarily because of the housing and credit bubble, and the improvement was a short term illusion. Now we are left with a massive structural budget deficit.

Note: there are many misconceptions about the budget and the National debt; too many to cover in this short post. But here are three key points:

Sometimes we see articles like this one that discuss future liabilities: A $75 trillion fright fest. But future liabilities should be discussed in terms of future income and GDP. As a percent of GDP, these liabilities aren't quite as scary.

If we look at the largest fiscal problems facing the U.S., they are in order: 1) health care, 2) the structural General Fund deficit (excluding health care), and 3) Social Security Insurance. In fact the potential shortfall for Social Security Insurance is dwarfed by the other two problems. We wouldn't know that from either presidential candidate.

If we are serious about the issues, the fiscal discussions should focus on health care and the General Fund deficit.

Fiscal discipline is difficult and requires constant vigilance (like a healthy diet). Sometimes voters can be enticed by the siren song of tax cuts that are really tax shifts. A tax cut, without a spending cut, resulting in a deficit is a tax shift; the taxes have been shifted from current taxpayers to future taxpayers. Like everyone, I'd like to pay less taxes, but not at the cost to future taxpayers.

This budget disaster was very foreseeable, but we wouldn't know that listening to Grenspan in 2001 or Bolten in 2005.

by Calculated Risk on 7/28/2008 09:33:00 AM

From the USA Today: Record deficit expected in 2009

The White House has increased its estimate for next year's deficit to nearly $490 billion, a record figure ... In February, President Bush predicted the 2009 deficit would be $407 billion.

The budget update shows this year's deficit headed under $400 billion ...

First, this is the Unified Budget deficit. By these projections, the General Fund deficit (the President's responsibility) will be around $600 billion this year, and $700 billion next year.

Second, these projections are probably optimistic.

by Calculated Risk on 6/11/2008 02:44:00 PM

From AP: Economic stimulus payments push May budget deficit to an all-time high of $165.9 billion.

The economic slowdown is definitely impacting receipts.

A key question is how much those stimulus checks are boosting consumer spending in May and June. According to the Fed's beige book, consumer spending was weak in May.

And yet the WSJ reported last week: Some Chains Posts Strong Sales Despite Gas Prices, Low Confidence

Retailers posted stronger-than-expected same-store sales for May [despite a] surge in gasoline prices and tumbling consumer confidence.

With the conflicting reports on consumer spending, the Census Bureau's retail sales for May might be interesting (to be released tomorrow).

It definitely appears the budget deficit will set a record this year - and this is the unified deficit - the General Fund deficit will be significantly worse (excludes the Social Security surplus).

by Calculated Risk on 5/03/2008 10:24:00 AM

Report to The Secretary of the Treasury from The Treasury Borrowing Advisory Committee of the Securities Industry And Financial Markets Association

The Federal government's budget balance is deteriorating in fiscal year 2008. Weaker economic activity has dampened the pace of revenue collection and lifted growth in economically sensitive spending. A recent survey of primary dealers estimates that the deficit for the 2008 fiscal year ending in September will exceed $400 billion with some economists expecting a deficit of more than $500 billion--a significant deterioration from fiscal 2007's deficit of $163 billion. Economic stimulus measures will complement the forces widening the budget deficit. This year's shortfall may surpass fiscal year 2004 as the largest on record in nominal dollars.

by Calculated Risk on 4/10/2008 02:20:00 PM

From AP:

The $10 Trillion man contest is on!