Wednesday, May 12, 2010

The federal budget is still bleeding trillions


For the 12 months ending April '10, the federal budget deficit rose $60 billion to $1.42 trillion, or about 9.7% of GDP. The deficit has been running at a $1.4-1.5 trillion annual rate since last June. As a percent of GDP, the deficit has shrunk from a high of just over 11% last September, primarily due to a modest reduction in outlays and an upturn in the economy (nominal GDP rose 2.5% from September through March).

There are tentative signs that revenues may have stopped declining, and this would make sense given the economic recovery that began last summer. Although spending has declined from its peak, under current law it is unlikely to decline much further as new spending and entitlement programs kick in. Consequently, we are unlikely to see any meaningful improvement in the U.S. fiscal situation before the November elections. A very large budget gap., record levels of spending relative to GDP, and intense pressure to raise tax rates are almost sure to be the major issues of the campaign. Every survey I've seen suggests Democrats will suffer significant losses in November, enough surely to make legislative gridlock likely, and maybe even enough to allow Republicans to veto the spending needed to launch Obamacare, thus putting a lid on future spending. It is not impossible either to foresee enough pressure developing to block next year's scheduled increase in income taxes.

The situation today is not pretty by any stretch of the imagination, but there is reason to be optimistic for the future.

12 comments:

John said...

I believe it was yesterday but there was a 'closed door' meeting between Fed Chairman Bernanke and the two ranking members of the Senate Banking Committee (Dodd-Conn. and Shelby-Ala). Now IF the truth could be known about everything that was said in that meeting I would be willing to wager some real Americn dollars AND GIVE ODDS that our budget deficit was one of the topics Chairman Bernanke and the senators discussed...and probably at length. I have known Shelby for a long time (not personally although I have met him) I believe he fully understands the problems our deficits can cause. I also believe Dodd understands them. These two men are the most powerful economicly savvy politicians in the legislative branch and I cannot help but think that behind closed doors with no reporters or cameras Chairman Bernanke gave them an earful. I cannot swallow the notion he would allow a chance like that to pass.

Its going to take some time but the dangers of huge and growing deficits for as far as the eye can see are becoming more and more obvious to the everyday citizen that does not pay attention to economics on even so much as a WEEKLY basis. Somewhere, somehow, our politicians have got to get the message too.

John said...

This is a little OT for this particular blog post but it is a subject we have discussed before.

It is incredible that the SEC STILL has no explanation for what happened in last week's two hour price meltdown. IMO it is just flat out negligent to allow these hedge funds to keep these computers running when we don't know what happened. Investors did not panic...the computers did.

I say again, TURN THEM OFF and make them trade the old fashioned way....AT LEAST until we have explanations.

Scott Grannis said...

I am persuaded by what I've read so far that the market meltdown last week had nothing to do with sinister forces or with computers run amuck. I think meltdowns of this sort are to be expected every now and then. The equity market is not as liquid as one would think. When a lot of people place stop-loss orders the system can become momentarily overwhelmed when prices are falling. The solution is for people to use limit orders, not stop-loss orders which become market orders when triggered. Another solution is for markets to institute temporary halts to trading if prices fall by a certain amount. This gives time for buyers to mobilize. Computers react too fast, and if there are no buy orders in place when stop loss orders are triggered, then prices can collapse, as we saw.

John said...

Scott,

I agree with you in principle. However there were many things that happened that day that simply have not happened before. For instance, PG traded from 62 to about 40 in just a few minutes. Also many ETFs experienced similar collapses. This is not ordinary volatility caused by momentary illiquidity. This is stark evidence of predatory HFT overwhelming systems not designed to deal with machines programmed to sense weakness (or strength) and expolit it with massive short selling (or buying). The system simply broke down under the weight of many of these things acting simultaneously. I fear to know the truth of whether TO THIS DAY the SEC knows HOW MANY of these contraptions there are. Gun to my head (and I sure feel like it is sometimes) I would bet they do not.

The politicians complain about the banks but we have an SEC that did not regulate the S&Ls, did not regulate the mortgage companies, and now (apparantly) are not regulating the hedge funds.

You may wind up being right. I just have not had my medicine today.

Scott Grannis said...

The huge price declines in some securities is perfectly consistent with the theory that, given the market's bearish mood going into last week, there were too many stop-loss orders and not enough buyers lined up to fill those orders. The computers were trying very hard to sell, but buyers could not react fast enough. So prices plunged. Once the market saw the plunge, the buy orders appeared, and prices returned to some semblance of normality.

I think everyone should be prepared for things like this to happen from time to time. There is no guarantee that markets are always going to be perfectly liquid, nor any guarantee that markets will not experience sudden discontinuous moves up or down. And even if you are right, I don't think there is any role for regulators to play here. Markets can discipline themselves well enough. Investors need to understand however that investing is risky.

John said...

I am fine with the normal risks of equity investing. I have lived with it for most of my life. And MOST OF THE TIME I do believe markets do a good job of regulating themselves. All I want from my government however, is a reasonable assurance that the field is as close to level as they can reasonably make it. I just don't see them sending that message. It is one of life's unfortunate facts that there are dishonest people out there that will exploit or game a system to make a buck and do not care who they hurt in the process. As a general rule I don't like government intervention in markets but IMO there are times when it is beneficial to know that there are rules and there will be consequences for those who do not follow them. I think market participants are owed an explanation from the SEC for what happened and reasonable assurances given that the problem has been addressed and corrected. We do that every time an airplane crashes. We can do it for unexplained market crashes, however brief, also. So far I have not seen one.

Just my cheap opinion.

John said...

Scott,

This is a relatively minor issue with me. Please do not feel like you have to hold my hand. I'm a big boy.

I appreciate your responses. Like I said, I ran out of my medicine yesterday and need to go get some more.

Have a great day.

John said...

Today is friday AM and Randall Forsyth of Barrons has a good piece in Barrons Online called "We're not Greece...Yet"

For those of you who can't access the site I suggest you keep an eye on RealClearMarkets.com - frequently his articles show up there in a day or two.

It is a good read if you are worried about the US plunging into the same hole Europe has fallen into. I do not always agree with Forsyth but I always like to know what he is thinking.

Dr William J McKibbin said...

Well, here are some ideas for the future. First, the government could seize all qualified plan assets from savers and apply those assets to the budget deficit -- this could be justified under the guise of putting "lazy dollars" to work for America. A second measure would be to increase the inheritence tax to 100% of assets transferred. Again, these tax revenues could be used to reduce the deficit under the guise of "fairness." Finally, a 28% value-added tax could be instituted for purchases of all goods and services, including healthcare, automobiles, and homes. Again, these revenues could be applied against the federal deficit under some other guise. If those measures fail, then the government could just print money faster. Everything will work out in the end -- keep the faith...

Dr William J McKibbin said...

Oh, I forgot -- we should also start to pay government workers more. Afterall, the more you pay someone, the more honest and effective they become. Tripling the pay of all government workers would be a good initial step in that direction. Plus, government workers should enjoy 100% of their pay for life after 8 years of service. We need to pay government workers more to ensure they perform their regulatory duties more diligently. Again, everything is going to work out in the end...

Dr William J McKibbin said...

One last idea on how the US can get its expenditure line moving up again. Why not start "help yourself accounts" for all Americans. The way the "help yourself account" would work is that a debit card would be sent to each American with an invitation to take as much money out of their "help yourself account" as they need or want. The main concern I would have with this inititative would be that my social security number not be associated with the transaction for privacy reasons. But, I think that "help yourself accounts" would be a big step forward to restoring growth in government spending...

John said...

Dr. Bill, That's a hoot!!