Sunday, August 23, 2009

$10 trillion deficit projection

The Obama administration late last Friday tried to quietly release the news that they are raising the 10-year federal deficit projection to $9 trillion from $7 trillion. A few trillion here and a few trillion there start adding up to a sum that is incomprehensibly large.

So I though it would be interesting to put this into perspective. To begin with, the total deficit in the 10 years ending December 2008 was $2.06 trillion, while the deficit for the 10 years ending July '09 was $3.1 trillion. The deficit in the first seven months of the current calendar year was $0.95 trillion. The deficit in the 12 months ended July '09 was $1.5 trillion. The total deficit accumulated during Bush's 8 years was $2.55 trillion.

Obama's $9 trillion projection is almost certainly based on overly optimistic assumptions. It could easily be $10 trillion, more than three times the deficit of the past 10 years, four times the deficit of Bush's previously-assumed profligate administration, and five times the deficit of the past 10 calendar years. Even when you adjust the deficit for the size of the economy, the projections we are looking at today are off the charts.

For anyone who worried about the pre-Obama deficits, this news is unimaginably bad.

The economy did reasonably well with deficits averaging only a couple of percent of GDP from 1968 through 2008, but now we're talking about deficits that are likely to be in the neighborhood of 6-10% of GDP (with this year likely to come in around 12% of GDP). There is no precedent for what we are facing, since it is orders of magnitude worse than anything we have seen in modern times. Spending is off the charts (see chart above), and tax revenues have never been high enough to finance the level of government spending that Obama has in mind.

My guess is that a $10 trillion deficit projection is enough to convince the voters that something is very wrong with the roadmap the Obama administration is trying to follow. I think the people are going to demand that Obama change his roadmap.

To attempt a massive expansion of government healthcare at a time like this seems downright insane. To attempt to radically change the way our economy uses energy, via cap and trade legislation, at a time like this seems absurd. We can't transform our economy and our healthcare industry when deficits are set to absorb some $4 billion every day.

Somehow I think we're going to figure out how to stop this madness. Obama is rapidly losing credibility and support, and the opposition to his policies is becoming more vocal and coordinated every day. Add to that mixture the explosive news of $10 trillion in deficits and you have the makings of some changes that could be very bullish for markets that are still very worried about the future.

UPDATE: I did some quick, back-of-the-envelope calculations using Obama's numbers, and come up with this: outstanding federal debt, which was about 35% of GDP in 2007, will exceed 70% of GDP before the end of Obama's second term, if he gets one. The only time that ratio was higher was during the height of WW II spending, when it briefly reached 115% of GDP.

UPDATE: The Concord Coalition lays out the rationale for the 10-year deficit to be $14 trillion.


Cabodog said...

Why anyone would vote for this idiot is beyond me. This will truly be one for the record books -- how slick marketing and the "coolness" factor of having a black president swayed voters and overtook common sense.

I am truly beginning to question Obama's motives. It almost seems that he is bent on destroying this country. Whose side is he on? Bin Laden seems to have a direct line to Obama's cell phone it would seem; failing to control oil, Bin Laden seems to have found a way to get a financial terrorist elected?

As Scott once pointed out, maybe this will turn out to be the last straw for the liberals. Only 14 more months until November, 2010.

Brian H said...

Cabodog -
Believe me, I've asked the same kind of questions, but one does not need to be a "financial terrorist" to bring this kind of insanity - far left is all that is needed. The beast of government is always moving to grab more of the GDP - de Tocueville had it nailed a hundred and sixty years ago. Its not just Obama - its a version of "invisible hand" of government which is set to override that of the free market.
Making this personal against any one small cabal of politicians misses the point while sending the wrong message. Today's Pelosi's and Obama's are just the liberals holding the reigns when the horse finally broke into a gallop. We need a small government leader and we need one quickly. Where do we look? If we're not careful, we'll just end up with a bunch of big-government "conservatives" at the next election.

Steve Grannis said...

The fiscal insanity in DC is obvious. We need term limits, some version of the FairTax and a gradual return to balanced budgets. The markets would sing. But average citizens don't get the obvious -- they just want more "free" ice cream -- so how are leaders going to be elected who do understand? I don't see anyone on the political horizon with the policy proposals and communication skills necessary to turn us around.

Public Library said...

Where were all of you when the government was backing trillions in financial obligations for bankers and shoveling cash through the AIG pipeline?

I smell gallons of hypocrisy spilled sloppily all over the place.

The right wants it's ice cream and eat it too. The left just wants more ice cream regardless of the cost. Both sides are completely lost in their own fantasy lands.

Sounds like the people who follow them are too.

We need smaller government EVERYWHERE. Not just in health care or energy. And who really thinks we live in a "free market" world? Come on, are you kidding me?

This is such typical propaganda. You want government when it is convenient. Yeah don't we all.

We need smaller government EVERYWHERE. that means the Fed, Congress, Executive Branches, State, Local, and the Treasury. They are all going for a massive land grab, not just the Dems my friends.

The banks and autos should have failed. Homeowners should have failed. Instead we have bigger and bolder government.

Did you really think it was going to turn out any different?

We need smaller government EVERYWHERE! Where are the voices? I just hear left and right propaganda, not real solutions.

pcpb participant said...

"Invisible hand of government," I like the new (to me) phrase.

And, Public Library has a good point about propaganda and political truisms.

As to the free market, we must never forget the "me first" contagion that got us here. Trading those credit default swaps and liar-loan bundles killed "market" economics for all practical, political, purposes.

Under "W" we lived a life of lies and incomprehension from the top down, paving the way for "Obama the opposite."

It's still lies and incomprehension, but from the other end zone this time.

McCain must speak up and gather other "real" men, or at least quote them, ...thus paving the way for, perhaps, "Romney the realist"?

("Real" means "incorruptible" first, ...then realistic.)

Scott Grannis said...

Credit default swaps and derivatives in general did not kill the free market. It's easy to blame them because they are very difficult to understand. But they were not the cause of our problems.

Public Library said...

CDS are not difficult to understand.

They allowed AIG to sell un-Godly amounts of protection they could not guarantee, to banks and investors who could not hedge the counter party risk on those same guarantees.

Everyone was playing in the same sandbox. Imagine that.

Hence the Taxpayer had to step in and make the banks/investors whole from AIG's ability to set off a CDS time bomb.

CDS are innocuous, until put in the hands of bankers who need to make a buck.

Just like guns don't kill people, people do, this does not mean we should all carry bazookas.

CDS unchecked are bazookas. A similar problem happened to LTCM. They were allowed to lever up the same trade the world over until a run was made on their positions. Sound familiar anyone?

But hey CDS help price discovery, right? Well until everyone runs for the exit and does not care what the "real" price is.

If LTCM had unlimited access to capital, they would have made money on their positions too. But that is not the point.

Taxpayers cannot be on the hook from crappy investors risk management.

A bit of a rant but the banks were allowed to steal from the taxpayer and kick em while their down.

It has been the biggest heist in history without a shot fired.

Scott Grannis said...

There's one very important fact about CDS that not everyone understands. For every seller of protection there has to be a buyer, and vice versa. For every winner there has to be a loser, and vice versa. CDS do not magnify risk, they only redistribute it. In retrospect, some firms held too much of the exposure, but it was too much only because credit spreads rose to levels that no one thought possible. In almost any worst-case market scenario there would not have been a problem.

Risk management can never eliminate the risk of a catastrophic event that goes way beyond the bounds of experience.

pcpb participant said...

I can't disagree with you about derivatives or other weapons of mass destruction, nor with basic "free market" truisms.

My point was that:

Presidents who don't "get it" for some reason can cause historic harm.

Now as we know, it wasn't the derivatives themselves, it was the contagion of unrealistic self interest as allowed by an uncomprehending leader.

The truism that "free market capitalism is the best way to prosperity" wants (requires but may lack) real leadership.

Truisms put voters to sleep. I suppose that's why demagogues use 'em.

Also, truisms make Public Library edgy.

Me too.

Scott Grannis said...

Sorry, but I don't see how a leader or any regulator for that matter should be held responsible for avoiding market catastrophes. And I don't see how free markets require "leadership" in order to work.

Markets work very well as long as governments don't distort things. We had a lot of distortions leading up to last year's crash. Freddie, Fannie, easy money, corrupt politicians protecting F&F, etc.

I would always put my trust in the free market to figure things out. I would never want to put my trust in any politician or even the greatest political leader in history. No single person is smart enough to beat the market consistently.

Public Library said...
This comment has been removed by the author.
Public Library said...

pcpb Lol. That made me smile!

I get tired of the right calling the left (fill in blank), and the left calling the right (fill in the blank).

These are such common platforms for each to fire off from but what it really does is distract people from the real issues.


You are correct:

"For every winner there has to be a loser, and vice versa."

Wall Street won. Tax payers Lost.

"Risk management can never eliminate the risk of a catastrophic event that goes way beyond the bounds of experience."

Then why would we let these firms trade in notional amounts they cannot cover?

I have no problem if you would tell me that if they go belly-up then so be it, but this is not the world we live in.

Therefore it is an asymmetrical corrupt market where we lose and they win every time.

Public Library said...


We do not live in a "free market" society. In addition, our government has always distorted the markets.

Not sure where your good sensibilities went. Must be all that sunshine or island fever over there ;)

Scott Grannis said...

Public: I can't disagree. Government distortions of free markets are a sad fact of life. But they do offer opportunities for profit is one is astute enough to spot bubbles in the making.

ronrasch said...

The US is the world's most free market. It will never be totally free as long as it is free enough to support innovation,entrepreneurship,risk & reward, consumer choice, private property, consistent rules, and stable currency, our free market will work. The degree to which politicians, courts, environmentalists, etc undermine these powerful ingredients is the degree to which our markets become less free. I agree with you that are markets not totally free. I am not totally healthy but I am somewhat healthy and I work in spite of what my wife tells me.

Scott Grannis said...

Well said.

pcpb participant said...


You say, "Sorry, but I don't see how a leader or any regulator for that matter should be held responsible for avoiding market catastrophes. And I don't see how free markets require "leadership" in order to work."

I am misunderstood and I attribute that to your free market religion and to my ineptitude, both. I apologize for my side of it and, as I practice your religion too, I'll invite you to a beer to chat over the rest of our misunderestimation.

Obviously, leaders set the tone and are the voice of authority. Chaos results as a society begins to disregard the command of its figurehead, stemming from the slow realization that their leader may be seriously out of his depth.

Call it my "house of cards" philosophy of American economics.

When the "vibes" dislodge that first card the whole house tumbles, ...and W was literally trumpeting "home ownership," ...remember?

I simply can't accept that a better man would have tolerated such unsavory lending in the first place but rather would have set the caution flags early and preempted chaos.

"Risk management can never eliminate the risk of a catastrophic event that goes way beyond the bounds of experience," SG.

But Vanguard avoided the catastrophe and so did Pimco, if memory serves.

Same data, better men?

And, not to push it, ...but wasn't that a nearly perfect "free market" in Credit Default Swaps?

All that seems to have been missing was an intolerant leader, so a different culture evolved, then collapsed.

Scott Grannis said...

pcpb: I'm sorry I misinterpreted what you were trying to say. You make a very good point. If the guy at the top doesn't believe in and understand free markets (e.g., like Reagan), then the likelihood of trouble escalates dramatically. Bush, who had a skin-deep appreciation for markets, looks like Son of Reagan compared to Obama.

The Lab-Rat said...

Hi Scott, you have frequently referenced the Baltic Dry when it fits the bull story. Why should we be ignoring its recent collapse?

Public Library said...

"So is the BDI a leading or lagging indicator? Unfortunately, the answer seems to be: It depends.

Let's take the long view:

Looking back to when all this volatility started in 2003, we can see why some consider the BDI a leading indicator. On average, as the BDI climbed, so did things like the DJ World Basic Materials Index, which contains all the precursors of industrial production. Both sharply fell during the Great Commodities Crash of 2008, and have been recovering since. But the connection is very far from perfect, or perhaps even useful; in several cases, the two move in opposition (for instance, mid-2006, and now).

The case for the BDI is even weaker when you look at CRB and BDI, where only the early 2008 peak and the subsequent Great Commodities Crash of 2008 periods clearly correlate.

And the case completely falls apart if you look at the most recent decline in the BDI:

Is the BDI still relevant as an economic indicator? I guess the answer is: BDI works when looking at long-term trends and strategy. But for current trends, other factors are more relevant.

So for investors looking for a crystal ball in the BDI, be careful: It's cracked."

pcpb participant said...

With your last comment, I agree.

The dire state of our economy,'s dire for most of us now,, ...calls for a Churchill lest some progeny of Mao or Marx take charge.

Unfortunately as you point out, ...that has already happened and the invisible hand of government is paper over the fist of capitalism.

We'll need more than this blog to right the ship I'm afraid. For those cushioned souls it's time to halve your fortunes and make politics, Peter Schiff is doing. He, for one, deserves your fullest support.


CDLIC said...

Enjoy the following three minute musical-video titled 'The Government Can'

Dead Cat Bounce said...

Brian I really enjoyed your post.

As to some of the other posts directed at villainizing Bush, it seems so misguided to me. Why do others get a free pass? It was Clinton who erroneously (yet probably altruistically) amended the CRA in 1993 and created subprime, turning Fannie/Freddie into huge gov't run hedgefunds at taxpayer expense (paying plenty of bad people along the way). The rating agencies then obscured the investment vehicles by providing false security for their own profit. This was the primary contagion. While I agree that the leverage ratios never should have been allowed to move where they did for certain firms and that CDS contracts that were supposed to act as insurance should not have gone completely unregulated, those things do not excuse the greater harm which was the gov't intervention of subprime/Fannie/Freddie, with Congress bailing them out at every step along the way.

Blame for political policies and economic cycles should not be settled like musical chairs: he who is without a chair when the music stops is guilty.

While I think that all should be held responsible, the blame game frustrates me beyond belief. As has been discussed, each side has its talking points that obscure the realities of the problems and perpetuates a broken system.

IMO the biggest problem we face is there is little transparency and accountability in the gov't as a whole. None of these politicians who profess to know it all are telling the truth; the corruption is rampant on both sides. Yet the voting constituencies continue to fall for this political bravado and slight of hand while failing to demand real reform. We cannot continue to allow these do-little, two-faced crooks to self-regulate. The scariest part is that the abuses we know of are only the ones that have been uncovered.

There are some sharp people here and we could all learn a lot from one another I have no doubt. Things need context and responsibility assigned, hopefully evenhandedly. But I think much more can be accomplished if we focus on the role of gov't which demands significant reform. DC is an abject mess, I fail to see how that is not the central issue for most of our problems. We need market discipline and animal spirits but we also need fair and effective regulation. We will never get the latter if we focus too much on which party is screwing us and lose sight of the system that enables it.

Obama's policies must be attacked b/c they are current, expand this corrupt system and threaten the currency. But the prospective solution is not the corollary in the sense of republicans, which I've not seen suggested by the author despite any bias towards the lesser of two evils, it's the corollary in the sense of limited gov't and actual accountability mechanisms. I haven't seen anyone's post that makes me think we could not all agree on this premise. I wish we could put aside our defensive and revenge egos for long enough to demand and shape real reform. Whether you hate Fannie more than Haliburton or vice versa, it should be apparent that both abuses are enabled by the same system.

Scott Grannis said...

Dead Cat: Thanks for a superb post! I hope I have not made the mistake (though I probably have inadvertantly) of saying that since Obama and the liberals are messing things up we need to replace him/them with conservatives. There are only a relative handful of conservatives out there who would be deserving of my support (most of them also being favorites of The Club for Growth).

Limited government should be the rallying call for all those who are appalled by the big-government activism that got its start with Bush and has reached its apogee with Obama.

Dead Cat Bounce said...

[Chuckle]. To me you have been quite clear, which is why some of the "anti-GOP" posts, seemingly written in retort to a point not being made, have grated on my nerves. If only the conservative leadership really represented small gov't, logical regulation and social policy, and pro-growth strategies all our lives might be so much simpler.

As always, very appreciative of your blog.