http://online.wsj.co...6648634011.html

 

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WASHINGTON -- The U.S. federal budget deficit broke through the $1 trillion mark in June, potentially complicating the Obama administration's efforts to revive the economy and enact its longer-term policy agenda.

 

The U.S. Treasury Department on Monday said the government's annual deficit reached almost $1.1 trillion by the end of June, a once-unthinkable level that could threaten any nascent economic recovery by undermining the dollar and driving up interest rates.

 

Surging deficits could also tie the administration's hands in responding to the economy's problems, by eroding support among voters and making Congress leery of adopting policies -- such as an overhaul of the health-care system -- that the administration believes are necessary for sustainable growth.

 

It could be hard to win congressional approval for another round of fiscal stimulus, if that was seen as necessary, even as the economy continues to lag and the unemployment rate continues to rise, hitting 9.5% in June.

 

Some budget experts questioned whether lawmakers had the political will to take steps -- such as tax increases and spending cuts -- to help get the deficit under control.

 

"Most anybody who's being honest knows we've reached a point where we've got a very dangerous fiscal situation, and it won't fix itself," said Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget. She said the White House and Congress should negotiate a broad plan to reduce deficits now.

 

President Barack Obama on Monday stressed the importance of enacting health-care legislation as a way to bring down long-term deficits. A spokesman for the White House Office of Management and Budget, Kenneth Baer, termed health-care reform "the key to our fiscal future."

 

But some budget watchdogs worry that Congress eventually could pass health-care legislation that relies on uncertain long-term savings, while substantially increasing short-term government expenditures.

 

The Obama administration in May estimated that the annual deficit would hit about $1.84 trillion by the end of the fiscal year, an increase from February's projection of $1.75 trillion. The administration also slightly revised upward its deficit estimates for 2010 and 2011, to $1.26 trillion and $929 billion, respectively.

 

Slumping tax receipts, particularly from corporations and individual investors, have contributed substantially to the widening gap, as has rising spending on social safety-net programs, economic-stimulus measures and aid to auto and financial companies.

 

By historical standards, the 2009 deficit -- at 13% or more of the country's gross domestic product -- would be the U.S.'s biggest since the end of World War II in 1945, when it reached 21.5%.

 

Some economists said the growing deficit hasn't had much impact on interest rates so far, despite a brief spike a few weeks ago. In part, that is because private-sector borrowing remains weak. Meanwhile, demand continues to be strong for the Treasury debt used to finance the government's deficit spending.

 

"The private-sector retrenchment is allowing the Treasury to raise a lot of funds at very low interest rates," said Jan Hatzius, chief U.S. economist for Goldman Sachs & Co. "There's a lot of demand" for federal debt.

 

Some economists also say the 2009 deficit doesn't appear to be deepening as rapidly as once feared. Still, high deficit projections, along with rising unemployment rates, appear to be starting to hurt Mr. Obama politically. Some lawmakers from both parties are expressing concern about the potential tab for a health-care overhaul, which could cost the government up to $1 trillion over the next decade if spending isn't offset by tax increases and savings.

 

"This trillion-dollar deficit makes clear that our nation's fiscal situation is dire, yet Washington Democrats keep borrowing and spending money we don't have and forcing our children and grandchildren to foot the bill," House Minority Leader John Boehner said in a statement Monday.

 

Some Democrats are also worried about the deficit, particularly the so-called Blue Dog moderates in the House. Rep. Charlie Melancon of Louisiana, the coalition's co-chairman, called for new budget restraints to be imposed on Congress.

 

"Our budget deficits didn't appear overnight and won't magically go away tomorrow," he said in a statement. "The Blue Dogs are working with the President and leadership in Congress to reinstate" pay-as-you-go rules that would require Congress to come up with budget cuts to offset many new programs.

The stimulus seems to be working. At the start of this year, the last thing we should have worried about was the deficit. We needed to jumpstart the economy.

 

We are going to have to make some real sacrifices at the end of 2010 when it becomes clear we are out of the recession. These deficits have to come down significantly, otherwise they will cause interest rates to rise sharply.

No, it isn't. The stimulus funds have only been marginally allocated. Unemployment figures are still astronomically high, which was the one component that the stimulus was supposed to address.

 

This problem was caused by a deficit-driven economy. The fundamentals have not changed. The dollar has been hammered over the past couple of weeks and has repeatedly marking new lows in the dollar index for the year.

 

Just because things aren't declining at a rate as quickly as they were in 2008, there is no reason to believe that our economy is out of the woods. There is merely a rally in stock prices and provides no indication in regard to the overall soundness of the US economy.

 

 

I'll bet you $100 that we'll be out of the recession by the beginning of 2010, perhaps even the end of this year. If you don't want to bet money, let's bet something else: you post a thread saying that prinmemo was absolutely right and you were wrong. If we dip back into a recession by the second or third quarter next year, I will post a thread saying you were right and I was wrong. Alternatively, you get banned for a quarter (or me). Your call. I am 150% certain I will win.

 

Sure, only about 20% of the stimulus dollars have been spent thus far, but that's still roughly $150, which would make it a very large stimulus on its own. Furthermore, the point of the stimulus was to provide stimulus money over the course of two years, because a one shot deal wouldn't be enough and it wouldn't make sense given that the economy was failing systemically.

The problem is that you aren't supplying any standards to adequately judge whether or not the recession has actually run its term. It is absolutely possible that we could see an increase in stock prices and a quarter or two of positive GDP growth and still not have shed the recession in light of the malinvestment not properly being liquidated.

 

The only people calling for the end of the recession now are the same US perma-bulls who were in denial that our economic fundamentals were unsound through 200/2008 leading into the recession.

 

 

You supply the standard and I will review and let you know.

You don't care enough because you're not very certain about what you're saying. In other words, I am calling total utter BS on your part. We'll see the economy grow at around 3% next year. We'll see us hitting positive growth the last two quarters this year. I can't say for sure yet - but I think we'll see a pretty sustained and significant expansion in the next few years so long as the government begins to reduce the deficit significantly.

I don’t care enough to place a wager with someone who has not even been a member for 24 hours.

 

As I’ve already said, looking at GDP growth figures are absolutely meaningless in this context. Recessions typically follow periods of artificial growth, which is what we observed during the period of low interest rates and artificially high housing prices. The recession is the correction to the artificial high. So far we have seen no actual correction and have not addressed the imbalances that cast us into our current predicament. We have not liquidated the malinvestments after spending too much money, borrowed too much, allocated too much credit toward consumers, and forced an artificial rise in asset prices while neglecting our productive base, or the source of genuine wealth. None of this has been addressed and we have actually worsened our condition.

 

Any consecutive quarters of positive GDP growth are merely illusory and provide no indication that we have actually solved these problems, only inflated another bubble.

 

 

I've been a member for quite a while, but I have had trouble retrieving my password for some reason. It says there is some sort of error.

 

I used to go by the screenname prinmemito. You and I have gone at it numerous times.

 

In any case, it should make no difference how long I've been a member.

 

Well, I also see by your post that you can never possibly be proven wrong. You will always claim to be right now matter what. If we have 20 years of sustained growth in excess of 5% per year you will make the same claim above. In other words, you've created a bulletproof argument which can never be proved wrong.

 

You're full of it.

The stimulus seems to be working. At the start of this year, the last thing we should have worried about was the deficit. We needed to jumpstart the economy.

 

I don't have time to be reading and posting but I'll just say even before the stimulus was passed we were projected to be out of the recession by Q3 or Q4 and almost the entire stimulus (~80%) was projected to be spent after we were out of the recession. We've being through this before so you know it.

The stimulus seems to be working. At the start of this year, the last thing we should have worried about was the deficit. We needed to jumpstart the economy.

 

I don't have time to be reading and posting but I'll just say even before the stimulus was passed we were projected to be out of the recession by Q3 or Q4 and almost the entire stimulus (~80%) was projected to be spent after we were out of the recession. We've being through this before so you know it.

 

Who says we were projected to be out of the recession by Q3 or Q4? Please provide links.

 

The truth is we were on a sharp fall. Many economists admit that the stimulus added about 1.5-2% of GDP growth.

I don’t care enough to place a wager with someone who has not even been a member for 24 hours.

 

As I’ve already said, looking at GDP growth figures are absolutely meaningless in this context. Recessions typically follow periods of artificial growth, which is what we observed during the period of low interest rates and artificially high housing prices. The recession is the correction to the artificial high. So far we have seen no actual correction and have not addressed the imbalances that cast us into our current predicament. We have not liquidated the malinvestments after spending too much money, borrowed too much, allocated too much credit toward consumers, and forced an artificial rise in asset prices while neglecting our productive base, or the source of genuine wealth. None of this has been addressed and we have actually worsened our condition.

 

Any consecutive quarters of positive GDP growth are merely illusory and provide no indication that we have actually solved these problems, only inflated another bubble.

 

 

I've been a member for quite a while, but I have had trouble retrieving my password for some reason. It says there is some sort of error.

 

I used to go by the screenname prinmemito. You and I have gone at it numerous times.

 

In any case, it should make no difference how long I've been a member.

 

Well, I also see by your post that you can never possibly be proven wrong. You will always claim to be right now matter what. If we have 20 years of sustained growth in excess of 5% per year you will make the same claim above. In other words, you've created a bulletproof argument which can never be proved wrong.

 

You're full of it.

Well, this makes things much easier then.

 

You should know fairly well by now that I don't subscribe to that phony school of economics that was in denial that a recession was coming despite the fact that many of them now agree that it was already forming as far back as late 2007.

 

We won't have 20 years of prosperity. We could easily have a year or two of positive GDP growth as a result of the bailout bubble and then slip back into recession, but the recession would still be the same one (that had merely just been prolonged) because our government failed to allow the market to correct itself.

 

What we are experiencing now is the sensation comparable to the heroin addict receiving a quick fix. Nothing has been cured (the fundamentals have not been fixed), but there is the illusion of a cure.

 

My prediction, if you are taking bets, is that we will have multiple quarters, possibly extending over one to two years (or maybe more), and then we will see the effects of inflation.

 

If we have five more years of low unemployment and low inflation, then I would have to rethink the validity of my projections.

 

Fair enough. I guess this is a long-term bet, then. I agree that keeping inflation under control in 2 or 3 years will be very challenging because of the massive federal budget deficit. Nevertheless, so long as real GDP growth is significant, I don't mind some inflation. Obviously, you don't want inflation to approach or touch double digits. We'll see what happens.

 

Also, I knew we were headed for a recession in 2007. The inverted yield curve throughout 2007 told us we were headed towards a recession. The fact that it lasted for so long indicates a rather serious recession. Inverted yield curves are always followed by a recession.

 

The curve now is better than normal and appears to be developing into a steep yield curve. All (or nearly all) steep yield curves have preceded significant economic expansion with relatively low levels of inflation. It looks like we may be headed in that direction. We'll see.

The stimulus seems to be working. At the start of this year, the last thing we should have worried about was the deficit. We needed to jumpstart the economy.

 

I don't have time to be reading and posting but I'll just say even before the stimulus was passed we were projected to be out of the recession by Q3 or Q4 and almost the entire stimulus (~80%) was projected to be spent after we were out of the recession. We've being through this before so you know it.

 

Who says we were projected to be out of the recession by Q3 or Q4? Please provide links.

The economists surveyed in the WSJ's forecasting survey published February 13. 2009.

The stimulus seems to be working. At the start of this year, the last thing we should have worried about was the deficit. We needed to jumpstart the economy.

 

I don't have time to be reading and posting but I'll just say even before the stimulus was passed we were projected to be out of the recession by Q3 or Q4 and almost the entire stimulus (~80%) was projected to be spent after we were out of the recession. We've being through this before so you know it.

 

Who says we were projected to be out of the recession by Q3 or Q4? Please provide links.

The economists surveyed in the WSJ's forecasting survey published February 13. 2009.

 

The same economists the predicted a short recession in 2008?

The stimulus seems to be working. At the start of this year, the last thing we should have worried about was the deficit. We needed to jumpstart the economy.

 

I don't have time to be reading and posting but I'll just say even before the stimulus was passed we were projected to be out of the recession by Q3 or Q4 and almost the entire stimulus (~80%) was projected to be spent after we were out of the recession. We've being through this before so you know it.

 

Who says we were projected to be out of the recession by Q3 or Q4? Please provide links.

The economists surveyed in the WSJ's forecasting survey published February 13. 2009.

Do you have a link for this? I don't remember hearing any such forecasts. However, I do know that the stimulus has drastically underperformed in terms of curbing unemployment, which is what it is primarily assigned to do. I remember reading a couple of weeks ago that unemployment levels were actually higher than predicted if we did not pass the stimulus bill. This is when the U6 numbers were over 16% unemployed. I haven't checked the numbers lately but headlines remarked that the percentage has been going down despite the fact the total number of unemployed has risen.

 

If we are experiencing a temporary bubble inflation (and again, since we haven't liquidated any malinvestment, slipping back a couple of years down the road would still be characteristic of the very same recession), is entirely attributed to the policy of the Federal Reserve and not characteristic of the stimulus. Economists are basing this "bounce" almost entirely upon rising stock prices (which is, in my opinion, a terrible indicator). The Federal Reserve has been engaging in quantitative easing (extension of credit) into the banks at low interest, while the banks in turn invest it. This is precisely part of the problem that brough us here and we will certainly again face these consequences; it's just difficult to know exactly when this will occur.

In the February '09 survey the economist were predicting GDP to grow 0.7% and 1.9% in Q3 and Q4 of this year.

 

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