Is $9 trillion estimate on deficit too low?

August 27, 7:15 AM San Diego Economy Examiner Mark Vargus

The midyear budget corrections from the White House and the CBO have been issued, and the item most people talk about is the fact that the White House increased its deficit estimates $2 trillion from the $7 trillion that had been the centerpiece of their economic policy back in January to approximately $9 trillion.

Most pundits have pointed this out, but some economists have started to observe that even the $9 trillion estimate of the CBO is potentially only 66% of the true deficit we shall see in the next ten years.

The best place to see this graphically is at the site of the  Concord Coalition They have a graph showing that they agree with the 2009 and 2010 estimates, but then diverge from the CBO estimates and predict higher deficits throughout the decade. However, they are willing to point out why:

CBO is required to assume that congressional appropriations continue increasing only at the rate of inflation for the 10 year baseline. They also extend emergency supplemental at their “current” level plus inflation over the duration of the baseline. For tax legislation, they assume current law will govern–so if there are tax cuts that have sunsets (as the 2001 and 2003 tax cuts have), CBO is required to project revenues assuming the tax cuts expire as written in the legislation. They also project economic growth in a very conservative fashion–they do not try to anticipate major changes in the economy, either recessions or accelerations.

Read that quote again. The CBO estimates are assuming no increase in spending beyond the rate of inflatioon, something we haven’t seen in years and which is very unlikely. The CBO also is projecting increase revenues from the expiration of the Bush tax cuts of 2001 and 2003, as well as no extension to the AMT waivers that have been passed every year. It has helped keep the deficit estimates lower than they would be otherwise.

Deficits can be a good thing if they are limited and understood, but when back in March the director of the president’s Office of Management and Budget declared that a $9 trillion deficit from 2010 to 2019 would be unsustainable and estimates now indicate that $9 trillion could be a $5 trillion underestimate, every American should be concerned.

And remember the coming deficits of Social Security and Medicare are NOT included, although current projections say that Social Security will not start running a deficit until after 2020. Medicare is expected to have insufficient revenue by 2017. If the plausible baseline is correct, there is little possibility that the world economy will absorb the deficits freely.

I maintain that economies are resilient and can recover from just about any downturn. However, they cannot recover if the governments engage in policies, which destroy faith in the currency and drive interest rates up. In the early 70′s many economists began to notice that Keynesian deficits were no longer stimulating the economy, and more than a few blamed the stagflation on government policies which squeezed the private sector. Now we are seeing the policies of that era brought back, even when people like Harvard Economic professor Greg Mankiw  point out that we are digging a deep fiscal hole that the entire nation will have to fill someday.

The Signs Are Not Positive For The Dollar!

The current policies of the U.S. Government clearly point to monetization of the debt. This policy is the inevitable result of the house cards based on the fiat currency policy.  It is just too easy for the government to inflate it’s way out of it’s debt and lay the burden on the taxpayer through the hidden taxation of inflation.

The Coming Deposit Insurance Bailout

Another lesson that federal guarantees aren’t free.

Americans are about to re-learn that bank deposit insurance isn’t free, even as Washington is doing its best to delay the coming bailout. The banking system and the federal FIC would both be better off in the long run if the political class owned up to the reality.

We’re referring to the federal deposit insurance fund, which has been shrinking faster than reservoirs in the California drought. The Federal Deposit Insurance Corp. reported late last week that the fund that insures some $4.5 trillion in U.S. bank deposits fell to $10.4 billion at the end of June, as the list of failing banks continues to grow. The fund was $45.2 billion a year ago, when regulators told us all was well and there was no need to take precautions to shore up the fund.

The FDIC has since had to buttress the fund with a $5.6 billion special levy on top of the regular fees that banks already pay for the federal guarantee. This has further drained bank capital, even as regulators say the banking system desperately needs more capital. Everyone now assumes the FDIC will hit banks with yet another special insurance fee in anticipation of even more bank losses. The feds would rather execute this bizarre dodge of weakening the same banks they claim must get stronger rather than admit that they’ll have to tap the taxpayers who are the ultimate deposit insurers.

It isn’t as if regulators don’t understand the problem. Earlier this year they quietly asked Congress to provide up to $500 billion in Treasury loans to repay depositors. The FDIC can draw up to $100 billion merely by asking, while the rest requires Treasury approval. The request was made on the political QT because, amid the uproar over TARP and bonuses, no one in Congress or the Obama Administration wanted to admit they’d need another bailout.

But this subterfuge can’t last. Eighty-four banks have already failed this year, and many more are headed in that direction. The FDIC said it had 416 banks on its problem list at the end of June, up from 305 only three months earlier. The total assets of banks on the problem list was nearly $300 billion, and more of these assets are turning bad faster than banks can put aside reserves to account for them. The commercial real-estate debacle is still playing out at thousands of banks, even as the overall economy bottoms out and begins to recover.

Meantime, even as it “resolves” and then sells failed banks, the FDIC is also guaranteeing the buyers against losses on tens of billions of acquired assets. This is known in the trade as “loss sharing,” which is another form of taxpayer guarantee that taxpayers aren’t supposed to know about. Most of the losses won’t be realized if the economy recovers. But this too is a price of taxpayers guaranteeing deposits. Even as Treasury and the press corps broadcast that the feds are making money on TARP repayments, these guarantees go largely unnoticed.

FDIC Chairman Sheila Bair continues to say that deposits will be covered up to the $250,000 per account insurance limit, and of course she’s right. But we wish she’d force Congress and the American public to face up to the reality of what deposit insurance costs. Amid the panic last year, Congress raised the deposit limit from $100,000. While this may have calmed a few nerves though the worst runs were on money-market funds, not on banks it also put taxpayers further on the hook.

The $250,000 limit was supposed to expire at the end of 2009, but in May Congress extended it through 2013, and no one who understands politics thinks it will return to $100,000. The rising bank losses mean that the FDIC’s ratio of funds to deposits is down to 0.22%, far below its obligation under the insurance statute to keep it between 1.15% and 1.50%.

Rather than further soak capital from already weak banks, the FDIC ought to draw down at least $25 billion from its Treasury line of credit. Ms. Bair is going to have to ask for the cash sooner or latter, and she might as well do it before the fund hits zero and we get another round of even mild depositor anxiety. We suppose Congress could raise a faux fuss, but these are the same folks who ordered the FDIC to broaden the insurance limit. They need to face the political consequences of their promises.

It is time that we had a simple lesson in common sense.  We are being led down the path to socialism and in so doing, we are about to kill the goose that laid the golden eggs.  Take a listen to Professor Walter E. Williams and suddenly things will become clear.  Professor Williams is probably one of the clearest thinkers on economics today, which probably explains why you will never see him on the mainstream media.

Be alert this week as  gold will take it’s cue from the direction of the dollar and move accordingly.  Gold is moving towards $1,000 per ounce, but the strength of its move is still dependent on the dollar.

Till next time, good luck and good trading!