Cincinnatus BLOG *** Political Commentary - Social Commentary

In an ironic twist of fate, it may be the fiscally responsible communist Chinese who save capitalist America from its budgetary excesses. They may well have to teach the wayward youngster a lesson in fiscal responsibility by refusing to fund continuing trillion-dollar deficits. Tough love from the Chinese may be the only prescription that rescues America from impending financial doom. The new administration is behaving like a kid in a candy store and it will take a bitter pill from the Chinese to bring them to their senses.

Federal outlays will soar in fiscal 2009 to $4 trillion, or 27.4% of our $14 trillion GDP, up from $3 trillion or 21% of GDP in 2008, and 20% in 2007. If we take the administration’s rosy recovery scenario at face value, fiscal 2010 spending will still be 24.1% of GDP with a breathtaking $3.6 trillion budget.

During the Bush years the budget rose from $1.9 trillion in 2001 to $3.0 trillion in 2008 and we went from a surplus of $128 million in 2001 to a deficit of $459 million (actual) in 2008.

In 2009, the budget deficit of $1.75 trillion will be a staggering 12.4% of the $14.2 trillion GDP, and the $1.2 trillion deficit in 2010 will be 8.0% of the administrations’ forecasted $14.7 trillion GDP. The administration’s blueprint predicts that this will fall back down to $ 581 billion or 3.5% by 2012, but this is based on very optimistic budget. Behind this ostensibly responsible sober budget are rather aggressive assumptions about GDP growth.  GDP is expected to grow to $16.5 trillion in 2012 and $20.1 trillion by 2016. Assuming President Obama wins reelection in 2012, the following are his estimated annual budget expenditures and deficits:

Obama Administration Budget (In billions of dollars)

Cut the budget deficit in half? Based on the administration’s projections, in their best fiscal, year 2013, they will have a deficit that will be nearly $100 billion more than George W’s worst year.  I believe that most of us thought that Bush was fiscally irresponsible. Aha! This must be new math! Half to the current administration must mean half of the first oversized budget that they fully control, 2010 ($1.2 trillion deficit), but more than any deficit, in any year, of any other administration in history.

What impact will this have on the national debt? Debt held by the public as a share of current-dollar GDP ran at 58.7% in 2009. Yet, even based on the President’s rosy scenario, the outstanding debt is projected at 67.2% of current-dollar GDP by 2019. Will China find us a credit-worthy borrower?  Approximately 50% of US debt is owed to foreigners, up from 31% in 2000, and it will undoubtedly continue to climb. If China and other foreign creditors lose their appetite for US debt, the result would be catastrophic for the dollar and the US economy.

With any luck the Chinese and other foreign creditors will send us an early signal that they are willing to fund the current $1.75 trillion deficit to help end the recession, yet not as willing to fund trillions in irresponsible deficit spending.

It is the message we need to hear to bring us to our senses.