U.S. deficit surpasses $1 trillion.

[rafterman]

Ha ha ha....guess you can always trim back next year.

That's 1,000 billions.

U.S. budget deficit tops $1-trillion for first time
Martin Crutsinger
14:47 EST Monday, Jul 13, 2009

Washington — Nine months into the fiscal year, the U.S. federal deficit has topped $1-trillion (U.S.) for the first time.

The imbalance is intensifying fears about higher interest rates and inflation, and already pressuring the value of the dollar. There's also concern about trying to reverse the deficit – by reducing government spending or raising taxes – in the midst of a harsh recession.

The Treasury Department said Monday that the deficit in June totalled $94.3-billion, pushing the total since the budget year started in October to nearly $1.1-trillion.

The deficit has been propelled by the huge sum the government has spent to combat the recession and financial crisis, combined with a sharp decline in tax revenues. Paying for wars in Iraq and Afghanistan also is a major factor.

The country's soaring deficits are making Chinese and other foreign buyers of U.S. debt nervous, which could make them reluctant lenders down the road. It could force the Treasury Department to pay higher interest rates to make U.S. debt attractive longer-term.

“These are mind-boggling numbers,” said Sung Won Sohn, an economist at the Smith School of Business at California State University. “Our foreign investors from China and elsewhere are starting to have concerns about not only the value of the dollar but how safe their investments will be in the long run.”

Government spending is on the rise to address the worst financial crisis since the Great Depression and an unemployment rate that has climbed to 9.5 per cent.

Congress already approved a $700-billion financial bailout and a $787-billion economic stimulus package to try and jump-start a recovery, and there is growing talk among some Obama administration officials that a second round of stimulus may be necessary.

This has many Republicans and deficit hawks worried that the U.S. could be setting itself up for more financial pain down the road if interest rates and inflation surge. They also are raising alarms about additional spending the administration is proposing, including its plan to reform health care.

President Barack Obama and other administration officials, including Treasury Secretary Timothy Geithner, have said the U.S. is committed to bringing down the deficits once the country has emerged from the current recession and financial crisis.

© Copyright The Globe and Mail

 

[fuji]

I don't see any fears of inflation anywhere. On the bond market 20 year treasuries are still paying a low yield, if people were worried about inflation you'd expect to see those yielding upwards of 10-15% but they aren't they are down around 4-5%.

 

[danmand]

It is a mathematical impossibility that the printing of $US's will not
be followed by an inflationary period within the next 5 years.

 

[fuji]

It is a mathematical impossibility that the printing of $US's will not
be followed by an inflationary period within the next 5 years.

Untrue. You are assuming that the money printed will wind up in circulation and the effect will be that you wind up with more dollars chasing the same number of goods.

That would be a wrong assumption.

In this environment people are hoarding cash and deleveraging. That means money is being taken out of circulation meaning that we will wind up with FEWER dollars chasing the same number of good--we are headed for deflation.

To get inflation two things have to happen:

1) The money printed actually has to enter circulation

2) It has to enter circulation faster than deleveraging and hoarding takes money out of circulation

Neither of those seem likely at this point, which is why the bond market is predicting no sigfnificant inflation for either the near or far future.

Money won't enter circulation because, once printed, banks will refuse to lend it, businesses won't invest it, consumers won't spend it--it'll sit on deposit and not actually chase after any goods.

It's also unlikely to keep up with the hoarding and deleveraging because so far the collapse in consumer borrowing has been greater than the run-up in govt debt, and also American consumers have switched from being net borrowers to quite significant net savers.

Put another way a newly printed dollar that gets stuffed under a mattress does not chase any goods and so does not contribute to inflation. Put yet another way google the phrase "liquidity trap" for a more sophisticated economic explanation of why printing money is not inflationary in a debt driven depression.

So, no inflation is not a mathematical certainty, nor is it even likely under these conditions.

 

[kupall]

Untrue. You are assuming that the money printed will wind up in circulation and the effect will be that you wind up with more dollars chasing the same number of goods.

That would be a wrong assumption.

In this environment people are hoarding cash and deleveraging. That means money is being taken out of circulation meaning that we will wind up with FEWER dollars chasing the same number of good--we are headed for deflation.

To get inflation two things have to happen:

1) The money printed actually has to enter circulation

2) It has to enter circulation faster than deleveraging and hoarding takes money out of circulation

Neither of those seem likely at this point, which is why the bond market is predicting no sigfnificant inflation for either the near or far future.

Money won't enter circulation because, once printed, banks will refuse to lend it, businesses won't invest it, consumers won't spend it--it'll sit on deposit and not actually chase after any goods.

It's also unlikely to keep up with the hoarding and deleveraging because so far the collapse in consumer borrowing has been greater than the run-up in govt debt, and also American consumers have switched from being net borrowers to quite significant net savers.

Put another way a newly printed dollar that gets stuffed under a mattress does not chase any goods and so does not contribute to inflation. Put yet another way google the phrase "liquidity trap" for a more sophisticated economic explanation of why printing money is not inflationary in a debt driven depression.

So, no inflation is not a mathematical certainty, nor is it even likely under these conditions.

i'm no expert but how are you so sure that these monies won't enter circulation? if it doesn't then consider all the governments spending programs right now to be a failure if you are assuming this

so what happens when people start spending again? inflation? so then. how does government get its money back? raise taxes? so if the taxes are raised how does personal spending/consumption increase? isn't that the objective of the government to get the consumer spending again eventually, so we will be in for another bubble bust economy again?

how does that become good in the long run? long term? so really all this is doing is to perpetuate the cycle that got us into this mess? whether it be the tech bubble, real estate bubble......

i'm just not sure that people are willing to go down this road again... the saving is happening because people are going back to basics and spending on needs not extras, the economy is actually correcting itself to realistic sustainable consumption whether we like it or not

so why do we have to force consumers to go crazy again, maybe this giant correction/recession is waht we need to get out of it slowly but correctly
the weak companies die off and the more resilient ones become successful...

then maybe the economy comes out stronger, but again i claim to be no expert on this matter, just looking back and realizing that there is difference really from the last time

 

[Cinema Face]

Message to Obama:

Could you print me up a couple of billion while you're at it?

 

[fuji]

i'm no expert but how are you so sure that these monies won't enter circulation?

My certainty primarily comes from the fact that the bond market agrees with me. People who put up billions of their own money appear quite comfortable earning a 4.5% return over the next 20 years. If I'm wrong, they are going to lose their shirts. They're smart guys who have spent a lot of time and a lot of money digging into this--if they thought we were going to see 10% inflation they would want at least 12% on their bonds.

if it doesn't then consider all the governments spending programs right now to be a failure if you are assuming this

Put it another way--were the government to do nothing we would suffer severe deflation. Since the government is doing so many inflationary things we will, instead, suffer very mild inflation.

That doesn't sound like a failure to me.

so what happens when people start spending again?

When people start spending again the government better stop spending. That is why temporary / short-term programmes and projects are better than long-term, permanent spending commitments in times like this.

inflation? so then. how does government get its money back? raise taxes? so if the taxes are raised how does personal spending/consumption increase?

Debt load is still much lower than post-WW2 so taxes do not need to be raised higher than they have been at any point between now and 1945.

how does that become good in the long run? long term?

It's a short-term / mid-term measure, it should not be kept up for the long-term. Long term yes you hope that private spending resumes and the government can back off and switch to paying debt down again.

the weak companies die off and the more resilient ones become successful...

That is what happens in a normal, healthy economy, or in a regular, shallow recession, such as the last recession.

A major economic collapse, however, does damage beyond the weak companies that need to die off, and starts eating into good, resilient companies with sound business models. That is not healthy when that happens.

 

[danmand]

My certainty primarily comes from the fact that the bond market agrees with me. People who put up billions of their own money appear quite comfortable earning a 4.5% return over the next 20 years. If I'm wrong, they are going to lose their shirts. They're smart guys who have spent a lot of time and a lot of money digging into this--if they thought we were going to see 10% inflation they would want at least 12% on their bonds.

Surely, people are smart enough to never loose money in the market.

 

[fuji]

Surely, people are smart enough to never loose money in the market.

If you think you're smarter there's a golden opportunity waiting for you--go sell short some US treasury ETF's.

Historically the bond market has been very good at predicting the future rate of inflation, but yup, it has been wrong sometimes in the past, and it could be wrong this time too--and you could get rich on this if everyone else is wrong and you're right.

 

[danmand]

If you think you're smarter there's a golden opportunity waiting for you--go sell short some US treasury ETF's. When I and the rest of the market turn out to be dead wrong you'll be rich.

I do not invest/play the bond market here in North america. I believe the $US
will be devaluated (in relation to commodities), and I have invested accordingly.

If you think you're smarter there's a golden opportunity waiting for you--go sell short some gold and silver ETF's.

 

[fuji]

US$ could be devalued against some other arbitrary currency (or gold/silver) without there being any significant inflation in the US.

If you bet on inflation in the US my prediction is that you will be baked, and then there will be cake!

 

[danmand]

US$ could be devalued against some other arbitrary currency (or gold/silver) without there being any significant inflation in the US.

A devaluation of the $US can only really happen in relation to commodities (gold, silver, oil etc). That is what
is called inflation in economics.

 

[fuji]

A devaluation of the $US can only really happen in relation to commodities.

It could be devalued against one, but not another. Inflation depends on whether or not it is devalued against consumer goods.

 

[kupall]

My certainty primarily comes from the fact that the bond market agrees with me. People who put up billions of their own money appear quite comfortable earning a 4.5% return over the next 20 years. If I'm wrong, they are going to lose their shirts. They're smart guys who have spent a lot of time and a lot of money digging into this--if they thought we were going to see 10% inflation they would want at least 12% on their bonds.

as smart as the guys in the largest banks in america who decided that real estate prices would never come down? the last time i heard this a lot of corporate types actually lost their shirts

Put it another way--were the government to do nothing we would suffer severe deflation. Since the government is doing so many inflationary things we will, instead, suffer very mild inflation.

That doesn't sound like a failure to me.

i'm saying failure because you claim the objective is to substitute private for government spending, when is this supposed to happen? according to obama now its a 2 year program, after then maybe, they will say it was miscalculated and it was too small... like what you are saying now

When people start spending again the government better stop spending. That is why temporary / short-term programmes and projects are better than long-term, permanent spending commitments in times like this.

if in fact they spent on such programmes, but how many percent of the stimulus is going to these programmes? majority went to EXISTING agencies that just got increased funding for social programmes, where are the new jobs supposedly?

Debt load is still much lower than post-WW2 so taxes do not need to be raised higher than they have been at any point between now and 1945

.

so we can actually borrow more? wow i had this crazy idea that this country was going broke

That is what happens in a normal, healthy economy, or in a regular, shallow recession, such as the last recession.

A major economic collapse, however, does damage beyond the weak companies that need to die off, and starts eating into good, resilient companies with sound business models. That is not healthy when that happens.

sooo then which companies died? or should i say which companies survived only because of government intervention? is that healthy when the government gets to choose which company it gets to save?

 

[danmand]

It could be devalued against one, but not another. Inflation depends on whether or not it is devalued against consumer goods.

If you don't mind, I think I will look elsewhere for predictions of the economic
future.

 

[fuji]

i'm saying failure because you claim the objective is to substitute private for government spending, when is this supposed to happen? according to obama now its a 2 year program, after then maybe, they will say it was miscalculated and it was too small... like what you are saying now

Well who knows how long it will take, but if history is a guide we are looking at something like ten years to claw our way out of this. Maybe twenty.

That is how long it took the last time something similar happened in the United States, and it is how long it took other countries, such as Japan, or Sweden, or Russia, to claw their way out when similar things happened to them.

As a general rule it takes at least a decade to recover from a depression or recession that is brought on by a crash of the financial sector.

You never know though: Maybe this time it's different.

Here's the thing though--the stimulus package is FAR less risky. The cost of executing the stimulus programme when it's not needed is unnecessarily sluggish growth for awhile, but generally a healthy economy. The cost of NOT doing the stimulus package when it turns out you needed to is a catastrophic depression and possibly, if it gets bad enough, the end of the United States as it exists today.

if in fact they spent on such programmes, but how many percent of the stimulus is going to these programmes? majority went to EXISTING agencies that just got increased funding for social programmes, where are the new jobs supposedly?

So long as the money winds up jingling in people's pockets it doesn't really matter.

so we can actually borrow more? wow i had this crazy idea that this country was going broke

Yes, much, much more. US debt is nowhere near its historic post WW2 high, and also nowhere near as high as Japan's, or even Canada's.

sooo then which companies died? or should i say which companies survived only because of government intervention? is that healthy when the government gets to choose which company it gets to save?

It's hard to say which companies survived only because of govt. intervention because the effect is indirect. It's little healthy profitable businesses that are still getting the financing they need to run normally that would have been shut down for lack of access to finances.

 

[Malibook]

Top Foreign holders of U.S. Treasuries (March 2009)
Holder Total
China $767.9 Billion
Japan $686.7 Billion
Caribbean $213.6 Billion
OPEC $192.0 Billion
Russia $138.4 Billion
United Kingdom $128.2 Billion

It's quite possible that foreigners are buying US debt to protect their massive investments rather than for the potential of tiny returns which could easily be wiped out by very minor devaluations.

Why does the US bother to sell treasuries to foreigners who are going to want to get something in return eventually?
Why doesn't the Fed just buy all of the US treasuries?

 

[fuji]

Top Foreign holders of U.S. Treasuries (March 2009)
Holder Total
China $767.9 Billion
Japan $686.7 Billion
Caribbean $213.6 Billion
OPEC $192.0 Billion
Russia $138.4 Billion
United Kingdom $128.2 Billion

It's quite possible that foreigners are buying US debt to protect their massive investments rather than for the potential of tiny returns which could easily be wiped out by very minor devaluations.

Why does the US bother to sell treasuries to foreigners who are going to want to get something in return eventually?
Why doesn't the Fed just buy all of the US treasuries?

20 year AAA corporate bonds are currently yielding 6% so it's not just foreign holders of US treasuries who think there is going to be very little inflation over the next 20 years. Five year AAA corporates are yielding 3.2% which is in line with near zero inflation.

 

[Malibook]

US Comptroller David Walker On 60 Minutes

http://www.youtube.com/watch?v=OS2fI2p9iVs

 

[fuji]

He's talking about long-term fiscal commitments, and I agree with him. That is something quite different than short term stimulus spending.

I have pointed out many times that Americans, publically and privately, were living beyond their means, and that it was unsustainable. Americans have had to cut back on their standard of living for quite some time, and that is in fact part of the problem.

There is a difference, though, between stimulating the economy to prevent it from falling off a cliff, and maintaining an unsustainable standard of living far into the future.