at first they said we would have trillion dollar deficits, both this year and next. now the official estimate is $1.2 trillion this year. according to bud conrad, writing for casey research, the deficit number could actually reach $3 trillion this year, or as much as last year's entire budget. buy silver and gold while you can.

Can the Budget Deficit Really Grow to $3 Trillion?

By Bud Conrad

The U.S. federal deficit could grow to the size of the total budget last year. That doesn’t make sense. It can’t happen.

Last fall, even before the 2008 fiscal year ending September 30 had ended, we published my calculations that the U.S. government was on track for a $1.5 trillion budget deficit in 2009. As the deficit in 2008 was a record $455 billion, a tripling of that number is serious. Initially, I was concerned that I might have been missing something, that there was something wrong with the numbers. And so I double and triple checked, and then realized that the numbers held up and even looked to understate the seriousness of the deficits. So, in recent months, we upped our forecast to expect a deficit in excess of $2 trillion.

As outlandish as that number is, with each passing day, the news supports an even further upward revision. To put a stake in the ground here at the beginning of 2009, let’s take a look at the data as we know them, then try to come to a conclusion as to just how bad it could be.

We’ll start with the base case as published by the Congressional Budget Office, the supposed non-partisan arm of Congress. The CBO base case includes only those items that have been legislated. This ignores potential updates, for example, additional spending for the wars in Iraq and Afghanistan and, most importantly, Obama’s new stimulus.

• The Office of Management and Budget (OMB) baseline deficit published January 7, 2009, starts out at $1.186 trillion.
  
  (For those interested in the raw data, the source is the Congressional Budget Office. See table 4, page 15: http://www.cbo.gov/ftpdocs/99xx/doc9... )

They admit there’s much more. So let’s see how much will have to be borrowed by the U.S. Treasury to fund the additional outlays now expected:

• The Obama stimulus package is expected to be $775 billion. That alone gets us pretty close to $2 trillion.

OMB makes assumptions about existing programs. Here are some snippets:

• The defense spending is estimated at increasing 5%, but they often allocate more:
  
  "Final appropriations and additional funding for operations in Iraq and Afghanistan may increase outlays for 2009 and beyond, and any stimulus package may raise discretionary spending further."

The $700 billion of TARP is only entered at $180 billion of outlays by estimating the present value of all future cash flows. OMB assumes the $700 billion TARP will be spent, but they are still claiming that they are investing in some profitable ventures. Even if that is the case (and I surely don’t trust Treasury to have made good investments), they will have to borrow the entire $700 billion to buy whatever troubled assets or banks’ equity they deem necessary. Even the White House is using a cash basis, not some accounting flimflam. So I say, add the total of the TARP accounting for $520 billion more. Here is the quote:

"Assuming that the TARP eventually disburses the full $700 billion that was specified in the legislation that created the program, CBO has estimated outlays of more than $180 billion for 2009 to account for the subsidy costs related to those investments and loans."

For economic assumptions, they recognize the economy slowing:

"In addition, economic developments have reduced tax receipts (particularly from individual and corporate income taxes) and boosted spending on programs such as those providing unemployment compensation and nutrition assistance as well as those with cost-of-living adjustments."

The GDP is projected to be flat compared to last year, and the 3-month T-bill is estimated at only 0.2% yield for the year. From those assumptions, the "net interest payments are projected to decline by more than 20 percent." But our view is that rates are likely to rise, and the economy is likely to get even worse, leaving us with lower tax revenue. On that note, it is of interest that at the bottom of the Great Depression, tax receipts had fallen 50% from prior levels. Anything approaching that level in the current slowdown would blow an even bigger hole in the budget.

On Fannie and Freddie, the cost is recognized as only $200 billion, but those two institutions, now de facto extensions of the U.S. government, have $5 trillion in guarantees:

"Recognizing the cost of the takeover adds about $200 billion (in discounted present-value terms) to the deficit this year, reflecting the long-term net cost of the more than $5 trillion in credit guarantees issued and loans held by those entities at the start of the fiscal year."

The purchase of mortgage-backed securities requires cash and borrowing by issuing new Treasuries, but it is not considered a loss to the budget because they are getting the asset:

"Additionally, the Treasury is purchasing mortgage-backed securities from the private market; CBO assumes that such purchases will total nearly $250 billion this year, thereby necessitating additional borrowing of a similar amount (although the budgetary impact of the purchases, shown as an estimated subsidy amount in 2009, is relatively small)."

There is nothing in here about the new healthcare promises. Try $300 billion as a down payment.

The tab for borrowing for next year (so far)…

$1,186 Base
$775 Obama stimulus
$700 - 180 = $520 TARP fully accounted
$300 Healthcare
$250 Accounting for MBS
$100 War supplement
$100 AMT, autos, or… or…
= $3 trillion !!!!!!

The news headlines are slowly catching up, now saying the deficit will be above $1 trillion. It is actually at least $2 trillion and, if the numbers hold up, heading to $3 trillion.

$3 trillion is 21% of the $14 trillion GDP! That was the size of all spending last year. The 2008 deficit was a record at $455 billion or only 3% of GDP. Even a $2 trillion deficit would still be 14% of GDP, a very dangerous and entirely unsupportable level.

The implications are explosive. To provide just one example, the 10-year Treasury rate is currently only 2.5%. How will the government handle a 5% or 10% interest rate on its $7 trillion of debt, let alone another $3 trillion?

That said, the deficit won't be that big, because something will break first. I don't know what: the bailouts, the dollar, new taxes, riots in the streets…





Remember, this is entirely separate from the Fed’s trillion dollars in bailouts and stimulus so far, which is also feared to grow. The Fed has no requirement to get a budget approved or to project what it is doing and has thumbed its nose (I was thinking of a more graphic analogy, but this is for a general audience) at a lawsuit from Bloomberg, which asked them to reveal their actions to the public. Amazingly, all the well-known economists from Roubini, to Feldstein, to Krugman want more spending.

If anyone wants to guess what the effect will be on the dollar, interest rates, or the economy, I'm looking for opinions. I bet you can guess where I’m coming from. This isn’t just your garden variety of government excess.

http://caseyresearch.com/drpRoom.php...