Sunday, August 23, 2009
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.
Posted by Scott Grannis at 12:43 PM