Record Deficit Spending: Is It Time To Worry?
Last Friday, the federal government announced that it will run a deficit of $46.6 billion for the month September. For those keeping score at home, the September total brings the shortfall to $1.42 trillion (yep, that's a "T") for the fiscal year. Although, this number is pretty much in line with the CBO's projection of $1.41 trillion, this is not a company earnings report where the game is about expectation vs. reality. No, this is a pile of debt that, in theory, will need to be repaid at some point.
To put the number in perspective, this is the largest deficit for a single fiscal year on record and is more than three times the deficit run up in 2008.
Economists will tell you that this in and of itself isn’t necessarily a big bad negative due to the fact that the U.S. economy is so large. Thus, it is important to look at the amount of debt relative to the size of the nation's GDP.
But unfortunately, the current year's deficit reached 10.0% of the nation's GDP according to Ned Davis research – the highest ever. This means that that government spent 10% more than it made in fiscal 2009, which is a little like a family using credit cards to spend more than they make.
Because the country's income was negatively impacted by the recession, federal receipts fell by 16.6% versus a year ago. NDR reports that individual income taxes declined 20.1% and corporate income taxes dropped 54.6%.
On the spending side of the equation, federal expenditures rose 18.2%, as unemployment insurance benefits ($117.1 billion in total) and other automatic increases took effect. And then there was the TARP bailout, which accounted for $129.3 billion and the MBS purchases via Fannie and Freddie, which cost $171 billion.
According to the Congressional Budget Office, we will see another big deficit next year as the projected 2010 fiscal year deficit will be $1.38 trillion. But since income to the government (i.e. tax receipts) should rise as the economy recovers, the deficit represents just 9.6% of GDP – much better, right?
To be fair, deficit spending by the government is not new to this administration and is a proven way for the government to help the country dig its way out of the economic hole created by the recession. And this is most definitely not the first time the government has embarked on such a path.
However, when one looks at the total amount of debt the U.S. is holding at the present time, there may be reason for concern. Forget about the mind boggling amount of money we now owe. The financing of the deficit is forecast to push the ratio of publicly held debt to GDP to 61.4% next year. This means that we've got loans outstanding that are equal to more than 60% of what we bring in.
Since a fair amount of the deficit spending is being done to stimulate the economy, we probably need to look beyond the current depressed income levels. And assuming the economy is able to move forward, the fiscal deficits will decline. However, the total amount of debt just might continue to present a significant challenge. And this is something to think about when the economy gets back on its feet.
** For More of David Moenning's Market Analysis, Stock Portfolios, and Trading Ideas, visit: TopStockPortfolios.com
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