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Crisis May Push USA Federal Deficit to Above $1 Trillion for 2009

Written by

John Hunter

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Cost of U.S. Crisis Action Grows, Along With Debt

The global financial crisis is turning into a bigger drain on the U.S. federal budget than experts estimated two weeks ago, ballooning the deficit toward $2 trillion.
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The 2009 budget deficit could be close to $2 trillion, or 12.5 percent of gross domestic product, more than twice the record of 6 percent set in 1983, according to David Greenlaw, Morgan Stanley’s chief economist. Two weeks ago, budget analysts said the measures might push deficit to as much as $1.5 trillion.
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The financial health and earnings prospects of Fannie Mae and Freddie Mac — seized by the government on Sept. 7 to prevent them from failing — worsened in the second and third quarters, the companies’ government regulator said this week.
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On top of all that, budget watchdogs say the sheer size of the interventions is making Washington more profligate than usual. To attract votes in Congress, leaders added several costly items to the $700 billion rescue, including extensions of some tax credits and tax breaks for makers of wooden arrows and stock- car racetrack owners.

Under normal circumstances, there would have been more resistance to such expenses, said Robert Bixby, executive director of the Concord Coalition, a non-partisan budget watchdog.

The news sure is not yet getting better. And our failure to act responsibly in good times now seriously increase risk. Just as someone that lived far beyond their means, with excessive debt, debt on multiple credit cards… we have continually elected politicians that had our government live beyond our means for decades. And that means we don’t have the resources to pay for the measures we are talking. For now the world markets are willing to give the USA government more credit cards to finance more spending. But at some point that stops.

At some point the loans have to be paid back. The only options are large reductions in spending, large increases in taxes or just printing more and more money people don’t want to pay off loans (which will cause massive inflation). There is also the possibility of growing our way out of the problems (the equivalent of yes, I have $40,000 in credit card debt but when I make $150,000 a year paying that off will be easy). To some extent this will happen (unless things get very very bad) but the level of economic growth needed is unlikely to fix the problem we make worse every year (as we fall further and further behind). We are now spending huge amounts to money we didn’t save in the good times. That means we are mortgaging even more of our future than we already had before this mess.

Related: Financial Market Meltdown – Warren Buffett Webcast on the Credit Crisis – FDIC Limit Raised to $250,000 – Financial Markets Continue Panicky Behavior – USA Federal Debt Now $516,348 Per Household

Plan Pushed for Government to Buy Bank Stocks

Bank nationalization would be a more extraordinary move for the US, but in a recent interview former FDIC Chairman William Isaac provided some rare insight into the matter. He said that during the Latin American debt crisis of the 1980s when major money center banks were facing possible loan payment defaults by sovereign governments, the US “had a contingency plan in place to nationalize [the banks].”

Grim economic reality faces next president

Republican John McCain or Democrat Barack Obama will walk into the Oval Office Jan. 20 facing the grimmest economic landscape in decades: perhaps 8 percent of the nation’s workforce unemployed, millions more families whose wealth in homes and stocks has evaporated, a global recession, a crippled banking system, ailing state and local governments, leery foreign creditors and a budget deficit that could easily cross the landmark $1 trillion mark.
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Michael Mussa, former chief economist for the International Monetary Fund, said next year’s deficit “is certainly going to be well over $1 trillion.”

IMF confident governments will avert meltdown

The IMF also specifically endorsed the plan of action put forth Friday by the Group of Seven nations, which calls for public funds to recapitalize banks. Critics said the G7 plan was woefully short on the specifics needed to calm jittery investors.
Although different countries may use different methods, they are all resolved to act as needed, said Youssef Boutros-Ghali, head of the IMF’s International Monetary and Financial Committee. “No tool will be spared.”.

Euro-Zone Economies to Prop Up Banks

The euro zone’s biggest economies prepared to unveil plans to spend tens of billions of euros in state funds to prop up their banking systems as leaders agreed on a menu of measures to cope with the growing financial crisis.

At a Paris summit, the leaders of the 15 countries that use the euro said they would partially nationalize their banks when necessary.

Comments

One response to “Crisis May Push USA Federal Deficit to Above $1 Trillion for 2009”

  1. dazzle Avatar
    dazzle

    However, USA was the puppeteer of other countries crisis, I believe deep in American heart realizes how people around the world hate you. I will not grateful to God for your financial crisis, it will only make me the same as you are. If someday your problem solved, be “kind”. I rather be a looser with no friend than a winner with friend hate you silently.

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