Budget deficit nears $1 Trillion (with 4 months to go) - and fallout

The federal budget deficit for May hit yet another record.

(AP) -- The federal budget deficit soared to a record for May of $189.7 billion, pushing the tide of red ink close to $1 trillion with four months left in the budget year.

Tax revenue is down 18% from last year while spending is up an equal amount. This problem is being noticed in the treasury market, where an auction today failed to attract the buyers it normally pulls in, and the 10-year reached 4% for the first time since October.

“There are an awful lot of Treasuries being auctioned and there’s going to be more and more and more and more,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee.

The 30-year bond yield touched 4.83 percent, the highest in a year.
“The auction was clearly disappointing,” said Ira Jersey, head of U.S. interest-rate strategy at RBC Capital Markets in New York, the investment-banking arm of Canada’s biggest lender. “These results don’t bode well for the bond auction tomorrow.”

Rates on long-dated bonds went up despite the Federal Reserve buying $3.5 Billion worth today.
A more alarming development that weighed on the treasury auction came from overseas, where Russia and Brazil were making noises.

(Bloomberg) -- Russia and Brazil, seeking to reduce their dependence on the dollar, announced plans to buy $20 billion of bonds from the International Monetary Fund and diversify foreign-currency reserves.

Russia’s central bank said it may cut investments in U.S. Treasuries, currently valued at as much as $140 billion, a week after China said it may reduce reliance on the dollar and American bonds. Brazil’s Finance Minister Guido Mantega said his country will purchase $10 billion of debt sold by the IMF, China will buy $50 billion and India may announce similar funding.

America isn't Japan. We can't fund our own deficit spending. We need foreign creditors, and they are starting to get scared because our deficits are out of control.
What's more, if interest rates keep rising it will counter-act all the good done from the deficit spending and loose monetary policy of the Fed. We can't print our way out of this mess.

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What do you think of this redstate action alert?

Normally I kind of blow off seemingly corporate agenda centered, Republican Redstate blog, but I saw this:

Oppose H.R. 2346, the 2009 Supplemental Appropriations Act

H.R. 2346.

saying Obama is going to use U.S. taxpayer funds to bail out Europe through sending billions to the IMF (shouldn't the IMF be sending funds with draconian dictates to the U.S. at this point?).

What would happen if we balanced the budget?

I understand your concern with runaway deficit spending. But in the face of the most serious economic downturn in over 70 years, would a balanced budget be a better option?

If we cut $1 Trillion from the federal budget, how many more millions get laid off? What happens to prices? Do we go into a wage/price deflationary spiral? Would the Fed or Treasury be able to guarantee deposits in ordinary commercial banks? Do you believe in the "treasury view" that Krugman has derided?

As far as I can tell, the only thing worse than big deficit spending here, is NOT big deficit spending here.

But why do you think a balanced budget would be better?

The current course is no longer an option

I hear what you are saying, but at this rate the markets are going to force us to reign in our spending (or monetize like Weimar).

It's gone beyond the idea of a choice. We are running out of road. There isn't enough capital in the world (without Weimar-like printing) to fund these levels of deficits.
For the first time in American history, we are going to have external forces exert control over our federal spending. We can either prepare for it, or we can let it happen. Choosing not to reign in spending will not be a one of the choices.

I have a compromise

Why don't they just cut out the corporate welfare parts. i.e. money going offshore, bad contracts which give no deliverable, including U.S. jobs, some of those projects which won't create any U.S. jobs and the obvious thing is to stop feeding the Zombie banks.

What percentage of this debacle is going directly into the Zombie banks never to be seen again, i.e. derivatives, CDS payouts, etc.?

I gave both you and NDD a 5 because it's both a major concern but which one screws us worse, out of control deficits or putting the economy in a nose dive by cutting spending during a deflationary recession.

Here's another question: when it comes to the deflation statistics...just how much of that is home prices and how much is it weighting the rest?

Because on my own finances, everything is getting jacked up, health insurance costs, rent, insurance, food....

No crystal ball here

I have no idea what's going to happen, only that it will in all probability seriously suck (though I'll be happy to be wrong).

We may not be Japan, but we're not Argentina or Thailand either, which means there is nobody out there big enough to bail us out if we collapse. If we collapse on a truly epic scale we'll be a lot smaller of course -- but so too will be everyone else. This is not a linear system, especially since we hold the de facto reserve currency. The collapse of the peso and baht were traumatic enough to the global economy, imagine the collapse of the dollar. Some may survive better than others but no one is going unscathed or close to it.

I'm leaning towards NDD here, but your positions are not entirely orthogonal. Clearly some choices will be forced on us, some for the better, like the fact that we can't spend 600B/yr to be the world's policeman anymore. Top marginal tax rates have to go up, and we'll have to treat income as income, not wages vs capital gains. We might well see de facto devaluation. I think we need to invest in education, science and technology, and modern infrastructure for as long as we can: doing so won't bleed us to death unless we're already terminal, and not doing so would guarantee an even longer rockier recovery. Things are still going to be grim, but I don't think they need be quite so grim for quite so long if we start acting like grownups now.

The current course is asking

us, do you want to be hanged at sun up or sun down. A balanced budget, a long term view of life, is something Americans no longer understand.

Yesterday I was reading a post from a woman complaining about how here three meds (BP and pain) were do for refill. She only had twenty dollars and that would only buy two prescriptions. Ok, staring me in the face is a woman saying she couldn't pay for her pain meds. Aside from the hard asset of the computer, how much does internet access cost each month? I would bet it would pay for her meds.

I've played in the very poor sandbox, didn't like it. I went without a lot, like a mattress to sleep on etc. There was a period that I didn't even have a roof over my head. I went without so many things. My experience was 37 years ago and I think American's today confuse want and need more than people did 37 years ago.

It would be refreshing if the governing body would show that they know the difference between want and need, if they would set the tone and balance their accounts. From the Feds to the States they are all in debt. Debts need to eventually be paid. Debt and people that didn't understand how to manage debt helped to start us on this failing economy?

Of the $ trillions the Feds are spreading into the system, how much is waste? How much really goes to fuel a growing economy. Funds that go out and can't be tracked is a foolish program. We give $billions to some car manufacturers and those said manufacturers are now in bankruptcy.

I would think to take our medicine now is better than to put off the problem, to hide our heads, to live in denial of a problem. It finally might be clear that it is better to heal the problem now, than at a later date have our legs amputated.


Education, Environment and Health care that is it. Everything else especially funding for two wars gets the axe.

If we ever recovery from this Great Recession taxes will have to go up there is no avoiding it. I would start with short-term capital gains.

Not to blame anyone (Bush) but here is a good article

about the situation. I was going to do a story on this but there are several already posted about the deficit: Link

Short term thinking

For years I've witnessed the CBO use adjectives such as estimates and projections. They play fast and loose with such adjectives.

The folks with the degrees and using operational research analysis to come up with the numbers to suit their needs. Sorry but they make me nervous and distrust comes to mind. Remember the roaring 1990's and the little trick called the Dot Com bubble.  During the tech boom, the venture capitalist money was flowing like water.  I knew people that worked at Apple and heard about the great parties.  You had unknown business owners that after their IPO, became overnight millionaires.  Then it all quickly vanashed, as if it were a dream.

Follow back a little bit further and you will can start to see when this wage stagnation - low imported product cost ratio started. The world and major economies are paying the price of the stagnating wages - low cost imported products ratio. Not sure if any of the western civilization will recoup their losses.

When it comes to financial magic, the government of the United States takes the prize. Sleights of hand and clever distractions by purveyors of line-of-credit mortgages, living-benefit variable annuities and equity-indexed life insurance are clumsy parlour tricks compared with the Big Magic of American politicians. Consider the proud trumpeting that came from Washington at the close of fiscal 2007. The deficit for the unified budget was, politicians crowed, down to a mere $162.8 billion. In fact, the U.S. government is overspending at a far greater rate. The total federal debt actually increased by $497.1 billion over the same period.

But politicians of both parties use happy numbers to distract American voters. Democrats routinely criticize the Republican administration for crippling deficits, but they politely use the least-damaging figure, the $162.8 billion. Why? Because references to more-realistic accounting would reveal vastly greater numbers and implicate both parties.

You can understand how this is done by taking a close look at a single statement on U.S. federal finance from the president's Council of Economic Advisers. The September statement shows that the "on-budget" numbers produced a deficit of $344.3 billion in fiscal 2007. The "off-budget" numbers had a surplus of $181.5 billion. (The off-budget figures are dominated by Social Security, Medicare and other programs with trust funds.)

Some numbers don't add up
But if you examine another figure, the gross U.S. federal debt, you'll see something strange. First, the U.S. debt has increased in each of the past eight years, even in the two years when surpluses were reported. Second, the gross federal debt, which includes the obligations held by the Social Security and Medicare trust funds, has increased much faster than the deficits -- about $3.3 trillion over the same eight years.

That's $2 trillion more than the reported $1.3 trillion in deficits over the period. Can you spell "Enron"?


You can even go back to articles in 1998 that mention declining standards, "under the last two presidents our standards have dropped"

No, Bill Clinton Didn't Balance the Budget

This article appeared on October 8, 1998.


Newt Gingrich and company -- for all their faults -- have received virtually no credit for balancing the budget. Yet today's surplus is, in part, a byproduct of the GOP's single-minded crusade to end 30 years of red ink. Arguably, Gingrich's finest hour as Speaker came in March 1995 when he rallied the entire Republican House caucus behind the idea of eliminating the deficit within seven years.

Now for the bad news for GOP partisans. The federal budget has not been balanced by any Republican spending reductions. Uncle Sam now spends $150 billion more than in 1995. Over the past 10 years, the defense budget, adjusted for inflation, has been cut $100 billion, but domestic spending has risen by $300 billion.

We have a balanced budget today that is mostly a result of 1) an exceptionally strong economy that is creating gobs of new tax revenues and 2) a shrinking military budget. Social spending is still soaring and now costs more than $1 trillion. Is this the kind of balanced budget that fiscal conservatives want? A budget with no deficit, but that funds the biggest government ever?

The budget surpluses over the next five years could easily exceed $500 billion. Leaving all of that extra money lying around within the grasp of vote-buying politicians is an invitation to financial mischief. If Congress and the president use the surpluses to fund a new spending spree, we may find that surpluses are more a curse than a blessing.

So with all the financial wizardry going on out there you can find one site saying yes and another site saying the answer is no. 

Why do I feel like a pawn?