Thursday, November 13, 2008

Spending balloons the deficit

Budget numbers for October came out today, and the big news was a huge increase in spending. That has put the federal deficit over the past 12 months at $618 billion, about 4.3% of GDP. Deficits typically increase during recessions, but this time the spending is being aggravated by bailouts, and we haven't seen the end of this story yet. Deficits still haven't reached the level of the early 1980s, and even if they do, it is still not reason for alarm. A budget deficit of 5-6% of GDP is not going to sink the U.S. economy all by itself. So far the government is not having any trouble whatsoever funding the deficit through the sale of T-bills and T-bonds. Indeed, the market is so hungry to buy Treasury debt that interest rates are at amazingly low levels even as the deficit has exploded.

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