The budget deficit is expected to increase to $490 billion in Fiscal 2009, which begins October 1, 2008, Bloomberg News reported Monday. The increased shortfall is due to a worsening U.S. economy, which lowers government receipts, and spending increases for the wars in Iraq, Afghanistan and the housing bailout, among other spending responsibilities.
Increased spending to pay for the housing bailout, including assistance for Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) will further increase U.S. Government borrowing, and the supply of dollars, "which almost guarantees that the dollar will fall more," so says currency trader Andrew Resnick. As a result, companies exporting goods to the U.S. are likely to raise their prices, a cost increase Americans will feel keenly.
However, Resnick said the dollar is likely to fall less, if the U.S. government increases taxes or the Fed increases short-term interest rates.
A dilemma for the Fed
Concerning interest rates, "they're likely to increase," economist David H. Wang told BloggingStocks Tuesday, but the pressure to raise rates will present the Fed with its worst monetary policy problem in a generation, he said.
"On the one hand, the Fed cannot sit idly by while inflation at the consumer level races ahead, perhaps to above 5% per year. That has to be checked," Wang said. "On the other hand, we need low interest rates to facilitate commercial activity to climb out of this period of very slow growth, if it isn't a recession. Higher interest rates would likely slow economic activity, which is why the Fed's hands are tied, to a certain degree, and it's going to need some help this time on the fiscal policy side. The Fed has only so much room to increase interest rates."
And concerning that fiscal policy Wang said "it's almost inevitable" that U.S. taxes, including income taxes, will have to be raised. Presumptive Democratic Party nominee U.S. Sen. Barack Obama, D-Illinois, said he would reverse the 2001 federal tax cut and increase taxes on the wealthiest taxpayers. Presumptive Republican Party nominee U.S. Sen. John McCain, R-Arizona, said he is opposed to raising taxes and would concentrate on reining-in government spending.
Wang said even with modest cuts in spending, a tax increase has to occur, absent a large rise in U.S. GDP, which isn't likely.
"Even if U.S. GDP growth accelerated to 6-7% per year in 2009, which is not likely, we're still looking at a $325-350 billion deficit, so a tax increase has to occur, in my view, given current defense and housing commitments," Wang said. "That's not the news investors want to hear, I know, but all government endeavors come at a price."
Economic Analysis: While it's important to point out that the projected $490 billion budget deficit is not as large as, in percentage of GDP terms, Reagan Administration-era deficits, the deficit, many economists agree, is above a level conducive to stable prices and low interest rates -- two components of a healthy economy.
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Reader Comments (Page 1 of 1)
7-29-2008 @ 11:09AM
NYC Banker said...
Didn't Bush make a campaign promise to cut the budget deficit in half by 2006? Yes he did.
"The White House acknowledged today that the federal budget deficit would reach a record $455 billion this fiscal year. But the good news is that President Bush promised to but the deficit in half by 2006." - July 15, 2003
He must have mis-spoke, he meant to say he would raise the budget deficit by 7% by 2008. Another epic failure by these incompetent con-men, that ends up hurting the average American.
7-29-2008 @ 11:59AM
John Hodge said...
I admit that we are economically experiencing a failure throughout our beautiful country on the part of the politicians not only in D.C. but at the state and local levels, also. Horrible business practices, atrocious judicial decisions, dismal leadership, moral decline in both the private and public sectors, unbridled greed, and on...and on. The only way we are going to remain a world leader is to be extremely selective about electing candidates into offices that impact (however small) our way of life and how we conduct our business here at home and abroad. As for me, I will not hesitate for a moment to crossover and vote for a man or woman of another political party whose record is solid, honest, and whose public/private life is an open book. God bless our troops and God bless America.
7-29-2008 @ 12:56PM
Anon said...
If Obama pulls the troops out of Iraq in the first 16 months of his presidency, then maybe we won't have to.
Of course the fed could just print more money to by selling securities to the China and Japan.
7-29-2008 @ 1:38PM
vcgh2000 said...
This, so called, budget deficit, is irrevalent anyway....Take the Iraq War, for instance, all the costs are in Supplemental Appropriations....none of the costs are reflected in the Budget Deficit. Same for Social Security...Reciepts are counted in general revenue....but expendatures are totalled up as unfunded liabilities.... this whole budget process is designed to be non-transparent.