December deficit nearly doubles

The federal budget went into deficit for the 15th straight month.

(CNNMoney.com) -- The U.S. government posted a deficit of $91.9 billion in December, nearly double the shortfall of a year earlier and marking the government's 15th straight month in the red, the Treasury Department reported Wednesday.
The shortfall brings the total deficit for the first quarter of fiscal year 2010 to $388.5 billion, up from $332 billion during the same period last year.

The fact that the budget deficit is running even worse than last year's should concern everyone. It's not like October-December period of 2008 had a strong economy.

The Treasury estimates the annual deficit will climb to $1.502 trillion for the full fiscal year 2010, up from $1.42 trillion in 2009.

The 2009 budget deficit was a massive $1.4 Trillion. A budget deficit of more than $1.5 Trillion would be sure to cause disruptions.

Interest paid on the debt in December was $104.6 billion -- 34% of federal outlays for the month.

34% of outlays just for interest on the debt is far too high. But when you factor in record low interest rates you quickly realize that any rise in interest rate payments will cause a crisis.

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This crisis has changed my thoughts on economics and finance

Things that I have learned and supposedly applied have been blown away and how I view the budget deficit is no different. Could we be wrong on how we view the budget deficit?

Government finances are not the same as household or business finances. Households/businesses are far more restrained fiscally than sovereign gov't particularly one with a sovereign currency. And besides, when someone like Pete Peterson and his ilk are pushing hard for deficit reduction, I question their motives.

Could it be that Wall Street is salivating over the prospect of social security being destroyed and retirement security turned over to the whims of Wall Street?

This is where I am heading: if the economy is not producing full employment then gov't should provide the (more efficient) fiscal stimulus to do so. Since, we are far from full employment then guess what deficit doesn't matter right now - IMO.

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Peterson

Just because one guy picks up an issue and uses it for his own purposes doesn't mean that issue isn't real by itself.

This is another reason for EP to exist, so we can look at budget deficits without worrying about the typical that's the Peterson Institute! attacks.

I think this might very well be a real problem and that's because I don't see the long term policies being put in place that would enable deficit reduction later.

Not the same situation to me as FDR and WWII, where they built up a massive industrial machine, which after the war, enabled the U.S. to become the dominant economy (and thus help with deficits).

On that privatize SS agenda, notice how that's a tough sell since S&P really hasn't bugged for a decade.

I went through the entire Peterson documentary and I found a lot of useful stuff and also pointed out the admittance that social security wasn't the issue.....

So, ya gotta kind of shift through the shit with them, IMHO.

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It's not just Peterson

What about his ilk: financial oligarchy. They want social security and medicare if they can get that. They tried with medicare advantage.

My bigger point or issue: are budget deficits really that bad from an economic standpoint. Obviously, politically we have been conditioned that they are bad. Again gov't finances are much different than household/business.

If the economy is not at full employment then reducing the deficit can actually hurt. Gov't spending becomes inflationary when we are at full employment. I am thinking out loud.

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more thinking out loud with you

Well, the Keynesian assumption is government spending, i.e. deficits are good when in a recession to help spur demand...but that said, how much of this is plain ole interest and how much of this is just flying out the window to China, India and God knows where?

I mean you're right, that's the assumption but I'm wondering if we need to look at a better breakdown here. There's "good debt" and "bad debt" and Keynes, unless I went to mathematical fantasy land, requires that the increase Gov. spending be put into the Domestic economy it wants to Stimulate.....not dumped off to Canada or where-ever and I suspect also doesn't include Zombie banks hording it and then trying to charge loan shark interest rates too.

So this would be one awesome blog post, to differentiate between deficit spending that actually stimulates and economy vs. deficit spending that is just sucking the money right out of the U.S. and to somewhere else which does not.

Thinking out loud, think this is a good blog topic (research topic)?

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Funny you mention it.

I have been reading up on an alternative economic theory that is quite different than how we have been conditioned by neo-liberal economic theory. It's called modern monetary theory. Once I understand it I can do a post on it. But I can tell you from early readings it is truly alternative. For a little taste check out:

Prof. Bill Mitchell's blog or
Prof. L. Wray Randall

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The answer is "yes"

are budget deficits really that bad from an economic standpoint

34% of our outlays are in interest from past debt, and that's with record low interest rates.
Even just a modest increase in interest rates to historical norms (which would double the current rates) would cause a budget crisis.

I think the thing that people are forgetting, and is causing the confusion, is that this isn't America circa 1950. We don't have an industrial base. We don't have trade surpluses. We don't have current account surpluses. We don't have a real savings rate.
We have a 3rd world economy with a 1st world currency. The rules are different.

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But is a budget crisis because of politics?

Our currency is key - we are the sovereign issuer of our currency - no one can force us into bankruptcy. Yes, we can issue more credits to credit bondholders accounts. So, insolvency even possible?

If it is not possible then what is the crisis - inflation? And this only a factor if we are at full employment. But if we are at full employment - tax revenues should be much higher - lower deficit and lower debt load.

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We can chose not to default

Because we can print the money means we never have to default, but that doesn't mean it doesn't come without severe, long-lasting costs.
And it won't be a slow adjustment no matter how much they try. Once our foreign creditors realize the situation is no longer tenable there is going to be a rush for the exists, and not everyone is going to be able to get out.

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Let me say up front I am not advocating irresponsible

unfettered gov't spending. We agree we can chose not to default.

Are we really printing more money when all we are doing is crediting bondholder accounts in order to service our debt? I don't think servicing the debt is what is inflationary - look at our current situation with huge debt load - what's TIPs spread - about 2% - not very inflationary there.

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midtowng blog request

My impression is you really research out deficits.

So, here is what I see. It seems we have confusion over "good debt", i.e. spending that Stimulates a local domestic economy, recycles and after our industrial base, and now U.S. domestic services come back online....the tax revenues and increased GDP will basically feed back to reduce the deficit.

Then, we have "bad debt". To me this is the monetary policy which monetizes the debt, China holding U.S. Treasuries and the interest alone we pay to other nations is a huge part of the debt. Then, cash outlays to private sector who aren't providing that much in the way of services (for profit medical sector, DoD no-bid contracts which are bloated and fail, money is offshored to goods/services abroad), that subtracts, permanently from our long term GDP growth because now we plain owe the money to all of these other nations/industries and we got jack shit for long term growth in return...

Anywho, I think it would be useful, esp. in the "left" side of the public discourse, to dig deep and differentiate between all of this.

It seems right now, due to the major attack on any social safety nets/middle class by those privatization neo-liberal/neo-conservatives both wings of the same bird nuts.....that the minute deficits and debt is raised as a topic, they blow off the entire thing believing it's those guys simply out to destroy what is left of any social structure to help people who are in trouble. The attack on SS being a huge banner which has put some sort of black shroud over debt/deficit topics by many on the left...

no one wants to look it because of the neo's attack on the people.

Anyway, I think it would be an awesome post at least and help folks (not only on the left but always blast back on the right for those thinking all debt/deficit spending is bad or social safety nets are "communist" and so on)

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Let me rephase the question midtowng highlighted

Are budget deficits ALWAYS bad from an economic standpoint?

Again budget deficits could be inflationary if we were at full employment.

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The answer is "no"

For the same reasons that not all debt is bad. Debt to pay for an medical operation, or to build a factory is a good thing. Debt for everyday consumption is a bad thing.

Same thing for a nation. Debt for an economic emergency is a good thing. But we are entering Year Two of that emergency spending, and we already had chronic deficits even before the emergency.

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