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Barron’s: Federal Deficit Is Set ‘to Explode’

By Frank McGuire   |   Newsmax

Be warned: The steady stream of federal red ink is getting to be a deeper shade of crimson.

explosion

As increases in annual U.S. budget gap add to national debt, blunt prospects for economic growth, and bode badly for America’s financial future, Barron’s reports.

The Congressional Budget Office (CBO) recently revised its projections for the U.S. budget in a report that began with an alert that, in fiscal year 2016, the budget deficit will grow, relative to the economy, for the first time since 2009. In dollar terms, that’s about a $590 billion annual gap, $152 billion wider than last year’s.

“If current laws generally remained unchanged—an assumption underlying CBO’s baseline projections—deficits would continue to mount over the next 10 years, and debt held by the public would rise from its already high level,” the CBO reported.

“In short, the federal budget deficit is about to explode,” David Ader, a government-bond strategist at Greenwich Capital, RBS, and most recently, CRT, wrote for Barron’s.

The agency projected that the debt held by the public will rise 3 percentage points to 77 percent of U.S. gross domestic product by the end of fiscal year 2016 this month, the Washington Examiner reported.

Debt has not hit that ratio since 1950, when the government was still in the middle of paying down the debt it incurred paying for World War II, the Examiner reported. By 2026, the office sees the debt rising from 77 percent of GDP to 86 percent. And it is poised to continue climbing as interest costs on the debt mount, along with payments for Social Security, Medicare, and other programs.

A budget deficit is the difference between what the federal government spends (called outlays) and what it takes in (called revenue or receipts). The national debt, also known as the public debt, is the result of the federal government borrowing money to cover years and years of budget deficits.

“This is a problem. It’s obvious that debts eventually must be paid. We can fret over how that will be accomplished, given the new normal of subdued economic growth (real GDP expansion averaged 3.2% from 1970 to 2000, 1.8% from 2000 to 2016, and 1.4% since 2006) and an aging population that expects to be supported in its grossly underfunded retirement,” Ader explained.

“That isn’t the only concern and may not be the biggest. The problem is that government debt is simply bad for growth,” Ader wrote.

“As the CBO study shows, seven years after the trough of the recession, the U.S. is about to see a sharp and lengthy widening of its deficit. That means more Treasury issuance competing with private-sector borrowing, and more uncertainty about how the debt will be paid, probably with higher taxes and/or reduced entitlements,” Ader said.

“What doesn’t seem likely or sustainable is an increase in the kind of federal spending that brings more growth. Thus, we can expect more middling GDP figures and easier-than-anticipated monetary policy. Even if the Fed hikes short-term rates, longer Treasury yields could fall.”

To be sure, some of the highest-profile invest experts have expressed concern over such a scenario.

Jeffrey Gundlach, who oversees more than $100 billion at DoubleLine Capital, warned of a “mass psychosis” among investors piling into debt securities with ultra-low yields.

Bill Gross of Janus Capital Group Inc. compared the sky-high prices in the global bond market to a “supernova that will explode one day,” Bloomberg reports.

Newsmax Finance Insider Lance Roberts also has warned about the soaring federal deficit.

“The problem today is that with a high dependency on government support, high levels of underemployment and rising budget deficits, the implementation of austerity measures will only deter future economic growth, which is dependent on the very things that need to be ‘fixed,’” he wrote in a recent blog.

“The processes that fueled the economic growth over the last 30 years are now beginning to run in reverse, and when combined with the demographic shifts in the U.S., the effect could be far more immediate and prolonged than the media, economists and analysts are currently expecting,” he wrote.

“Sacrifices will have to be made, the economy will drag on at subpar rates of growth, individuals will be working far longer into their retirement years and the next generation of Americans will lead a far different life that what the currently retiring generation enjoyed.”

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