America’s Deficit Disorder

From: Front Page Magazine:

The U.S. Treasury deficit---what the government spends over and above its income---will nearly triple in 2009 alone, to $1.19 trillion. Worse, the cumulative U.S. budget deficit will reach almost $2 trillion in the next five years.

All this only spells big trouble for overburdened U.S. taxpayers and businesses now keeping the government afloat. It will be like trying to stretch a 10-inch diameter buckskin over the head of a 30-inch diameter drum. And taxpayers and businesses will be asked to do most of the stretching.

Assuming that U.S. economic policies remain unchanged---and the Federal Reserve Board has already expended most available economic rocket fuel by cutting to nearly zero the “federal funds rate” charged on overnight interbank loans---Obama can't do much more than that besides printing money.

And print money, Obama surely will.

In fact, the Bush administration gave the greenback presses a galloping start. Since August, the Fed issued “tons of newly created dollars into the economy,” doubling the monetary base---the nation's total bank reserves plus U.S. currency--- a “phenomenal increase” that had some (erroneously) worrying about the potential for steep inflation, reports the Wall Street Journal.

The federal government has already allocated at least $7 trillion to the nation's “economic rescue,” including the $700 billion Troubled Asset Relief Program (TARP), last year's $168 billion Economic Stimulus Act, the $300 billion loan-loss backstop for Citigroup and $152 billion AIG rescue. Of those allocations, the U.S. has already torn through upwards of $2.7 trillion---not counting $167 billion in emergency tax rebates granted to consumers.

Meanwhile, U.S. taxpayers still face the extraordinary deficit burden already heaped upon them---and only likely to grow under the Obama administration. As Melloan noted, in the 1990s, “Japan tried to spend its way out of its post bubble malaise,” but merely accumulated “a mountain of debt” and lost a decade to “little or no economic growth.”

Even if the national deficit increases no further, national debt would grow more onerous in the case of a Great Depression-like deflation tornado, such as shredded the U.S. economy and in 1933 raised unemployment to 24%. The debt will remain the same or even grow until it is paid off, while incomes and the tax base shrink. Keep in mind, as in 1933, interest rates and stocks have already declined steeply.

Moreover, to cover the U.S. deficit, taxes will certainly rise. In an inflationary environment, those new taxes could broadly pass to willing (or resigned) consumers. Now, however, in a contracting economy, they must be spread more narrowly to shrinking companies and a shrinking pool of workers. Companies are likely to respond by further slashing jobs, thus adding to the very grave potential for a deflationary spiral.

I think this article dose a great job of describing the imediate issues that Obama faces and the potential that bad policy will make things worse, not better.