With US Budget Deficit At $455 Billion, Government Options Narrow

The federal budget deficit hit $455 billion for its September fiscal year. That is up $389 billion from the year before. The deficit will certainly get a lot worse. The bank bailout is not just expensive, it is not over. If housing prices continue to fall, write-offs for mortgage-backed paper and consumer loans will rise sharply.

Then, there is the matter of lost jobs. If unemployment goes to 8%, another two million to three million people could be out of work. The tax base will be eroded. IRS receipts will go down. Even taxing the wealthy won’t make up the difference unless the tax increases to 100% of  their income.

Bringing in more money for the current government fiscal year may not be that hard. If, that is, China and oil-rich nations in the Middle East will keep buying US paper. If not, the ability of America to throw capital at problems like bank losses could be significantly impaired.

The reason that rich overseas nations would continue their infusion of capital into the US Treasury is that it is self serving. If the US has money, it can fund economic expansion. That allows America to buy more oil and import more goods from the Far East. China’s exports to the US keep growing as does its GDP. OPEC states get more capital and simply get richer. They may let some of their money out in the form of sovereign fund investing. In reality, the dollars are buried deep beneath the sand. Rainy day funds.

The re-cycling of money into the US out to wealthy nations and back in the form of buying US treasuries works until it doesn’t. If a deep recession develops, foreign nations may get nervous about the ultimate value of American government paper. That may not be a reasonable position to take, but panic does not always lend itself to clear thinking.

The pipeline of cash into the US could be shut down.

Douglas A. McIntyre