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The Deficit Paradox

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Where will the money come from?

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From ghoulies and ghosties
And long-leggedy beasties
And things that go bump in the night,
Good Lord, deliver us!
-Old Scottish Prayer


There's something that's bumping around in my worry closet. The bond market isn't behaving as if there's deflation in our future, and the dollar is getting weaker.

Unemployment keeps rising, but most of all, the US government deficit looks to be spinning out of control. This week we look at all of this and take a tour around the world to see what's happening. There's a lot of interesting material to cover.

A Trillion Dollars as Far as the Eye Can See

As of this week, total US debt is $11.3 trillion and rising rapidly. The Obama Administration projects that figure to rise another $1.85 trillion in 2009 (13% of GDP) and yet another $1.4 trillion in 2010. The Congressional Budget Office (CBO) projects almost $10 trillion in additional debt from 2010 through 2019. Just last January, the 2009 deficit was estimated at "only" $1.2 trillion. Things have gone downhill fast.

But there's reason to be concerned about those estimates, too. The CBO assumes a rather robust recovery in 2010, with growth springing back to 3.8% and then up to 4.5% in 2011. Interestingly, they project unemployment of 8.8% for this year (we're already at 8.9% and rising every month) and a rise to 9% next year. It will be a strange recovery indeed, where the economy is roaring along at 4% and unemployment isn't falling. (You can see their spreadsheets and all the details here, but take your blood-pressure medicine first.)

Just a few thoughts. This year, the proposed administration plan is to borrow 50% of every dollar spent. The CBO projects than nominal GDP will grow by about 50% over the next 10 years (which is historically reasonable), but also that revenues will double - which suggests massive tax increases in relation to GDP. Interestingly, the International Monetary Fund says growth next year will be tepid at best (more below). The deficit in 2010 is almost 10% of GDP. The average proposed deficit is almost a $1 trillion average for the next 10 years. Ten years from now, the deficit is projected to be $1.2 trillion. And that's if government costs don't go up and inflation only averages 1.1% for the next 6 years.

The Global Recession Gets Worse

Let's take a quick trip around the world. In the first quarter, the German economy fell by 14%. Japan fell by 15%, Mexico by 21%, and England was down almost 8%.

Global trade is simply collapsing. The chart below is the ugliest it's ever been. Exports are down - China's by 41%, Japan's by 38%, Germany's by 32%, and so on.


Click to enlarge
No positions in stocks mentioned.

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