Wednesday, November 5, 2014

US Annual Deficit Shrinks - But Expected to Rise Again

The US has been fortunate that there has been enough economic growth to but the annual deficit in half lately. This Bloomberg article covers that but also notes that the reprieve is expected to be short lived. There are some long term factors working against the US. Below are some quotes from this article and then some comments.

"Robust economic growth has helped push the U.S. budget deficit down to the lowest level since 2008, marking the sharpest turnaround in the government’s fiscal position in at least 46 years."

"The shortfall of $483.4 billion in the 12 months ended Sept. 30 was 2.8 percent of the nation’s gross domestic product of $17.2 trillion over the same period, according to data compiled by Bloomberg using Commerce Department figures. The figure peaked at 10.1 percent of GDP in December 2009."

"The narrowing budget deficit has bought time for lawmakers to solve long-term threats to the economy such as the cost of retirement benefits. Gregory Valliere, chief political strategist for Potomac Research Group, said the fiscal relief may be short lived as austerity-weary lawmakers eventually boost spending on defense and other programs."

“I can see the beginnings of a pendulum shift away from fiscal restraint,” he said.

"The Congressional Budget Office in August predicted the deficit will shrink further this fiscal year, to 2.6 percent of GDP, before rising to 2.9 percent in the presidential election year of 2016. Before the fourth quarter of 2008, the last time the deficit-to-GDP share reached 2.8 percent was in April 2005, the data show."

"Scott Brown, chief economist at Raymond James & Associates Inc., said the fiscal improvement has muted the political debate over the budget ahead of today’s midterm congressional elections. “The bigger problem with the budget is really the long-term pressure, and has to do with the retirement of the baby-boom generation,” Brown said."

"The CBO’s baseline budget predicts spending on mandatory programs, including Social Security and Medicare, will expand by 72 percent to $3.63 trillion in 2024 from $2.11 trillion this year. That would raise the budget deficit as a proportion of GDP back to 3.6 percent, according to the CBO."

“Clearly the level of debt matters for fixed-income investors,” said Davis, whose firm is the largest mutual fund manager with about $2.64 trillion in assets. “The U.S. has been for years a special case because it’s the international reserve currency. But that right is neither permanent nor pre-ordained.”
My added comments:This drop in the annual deficit along with the news that Japan will be ramping up a giant new QE program allows the Fed some breathing room to back off from buying bonds and creating stimulus to keep the US stock market afloat for the short term. Japan has said a chunk of its new QE stimulus will be headed into foreign stocks so the US stock market will benefit from that. That is the short term good news.

Unfortunately, none of this solves the ongoing long term debt problems in the US or anywhere else around the world. A glance at the national debt clock will quickly remind you that the US is still on an unsustainable long term path even if the deficit has shrunk some here in the short term. The debt already piled up is over $56,000 per person. If you add in the unfunded future liabilities (Social Security and Medicare), that rises to over $385,000 per person. Let that sink in.

The Bloomberg article points out that the demographics of the retiring baby boomers loom in the future with no solutions of any kind yet put forward. All of this clearly proves the present system is unstable and unsustainable long term. What we all are waiting for is to see how this resolves itself over time. In a sudden short term crisis triggered by some unexpected event OR just a slow and steady decline  that drags out several more years. The problem is that no long term solution exists as of today. The Central Banks only plan is to try and pump inflation up enough to pay off these gigantic debts with cheaper currency over a long period of time. Something they are unlikely to be able to pull off. So we wait and watch. 

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