The Obama administration sits between an economic rock and a political hard place.  Others might call it a contradiction.  Obama needs to cut spending, but he’s doing this at the same time that more spending is being introduced (on job creation, more troops in Afghanistan).  Slight cuts in some areas are supposed to offset increased spending in other areas.

It all walks a precarious fine line and depends on several assumptions about the direction of stock markets and the willingness of foreign buyers to keep buying U.S. debt instruments.  Some will argue that China (the largest holder of U.S. debt) can’t but keep buying U.S. debt.  Others point out that China (and many other countries) have already started to slowly diversify out of U.S. dollars and diversify their trading partners.

The New Volatility: Are Stock Markets Increasingly Affected by Politics?

Fiscal Year 2010 and Current Fiscal Deficit

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A fiscal year runs from October to September, thus, the 2009 fiscal year ended in September 2009.  The deficit for the current fiscal year (i.e., 2010) = 1.35 trillion, which means that it totals 9.2% of the gross domestic product (GDP), according to the Congressional Budget Office.  The U.S. budget deficit from the previous fiscal year was 1.4 trillion USD.

These deficit levels (for 2009 and 2010) have not been seen since World War II.  Economists hold that deficit levels should never rise above 3% of GDP in order to maintain sufficient economic growth.

According to the nonpartisan Congressional Budget Office, the continued unfolding of the federal stimulus plan will add another $400 billion to this year’s deficit, and when it has all been finally administered, will add up to a total of $860 billion ($75 billion over initial projections).

How much money can the U.S. government borrow? Currently, about $12.4 trillion.

As things stand, President Obama will face a difficult time enacting any proposals for reducing the size of the federal budget deficits and federal debt that he will announce in the State of the Union address today (Wednesday, January 27, 2010).  Yesterday the Senate already rejected a bipartisan proposal for a task force focused on reducing the size of the budget.

Obama’s stated goal is to cut the deficit in half by the end of his term in 2013, and the CBO report states that the administration is on schedule to reduce the deficit down to just 3.2% of GDP by fiscal year 2013.  Some analysts fear that Congress won’t allow some of Bush’s tax cuts to expire on schedule at the end of 2010, particularly the cuts benefiting the middle class.

When the Fed is Expected to Raise Interest Rates

Size of U.S. Federal Debt is Growing

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Worse, the federal debt is quickly escalating and the interest payments on this debt will make balancing the budget difficult.  According to the Congressional Budget Office, the amount of interest payments that will need to be made on this debt is going to more than triple over the next 10 years.  Well beyond any of Obama’s “spending freezes” on health care and education, these debt levels are going to prohibit spending on other areas in addition – areas that might have helped contribute to economic growth.

Moreover – and perhaps much worse – are the growing costs of government obligations such as Medicare and Social Security.  Payouts will be rising over the next decade dramatically and the money coming in from younger workers to support these payouts will be much less, leaving the government in a deficit situation and forcing the money to come from other areas.

The End of Influence: What Happens When Other Countries Have the Money?

Indeed, from year-to-year, how will the Obama adminstration trim spending and the overall debt if money is just being taken from one hand and put in the other?  Debt levels need to be reduced, but there is more stimulus to unfold.  In order for there to be real economic recovery, employment levels need to improve.  Politicians and economists will, of course, disagree on the best way to create new jobs, i.e., to solve the unemployment problem.

A jobs bill was passed in December that would cost about $155 billion – and the Senate is preparing another one to follow it.  If this much more borrowed money (remember, much of it is coming from China) is going towards job creation, it means that much less is going to go towards other areas in order to still lower overall deficit levels.

Zhou Xiaochuan’s Proposal For World Reserve Currency is Accepted by UN (March 29, 2009)
U.S. Dollar Up For Debate At G8 Meeting (July 5, 2009)
Supracurrency Coin Proposed As New World Reserve Currency (July 12, 2009)
World Bank: Don’t Take USD Reserve Status for Granted (Sept. 27, 2009)
Sucre, New Latin American Currency To Replace USD for Trade (Oct. 19, 2009)
Monthly Auction Amount of U.S. Treasuries Continues to Increase (Oct. 27, 2009)

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• Sucre, The New Latin American Currency To Replace US Dollar For Intra-Regional Trade
• China Pushes More Diversification In Foreign Exchange Reserves As Part of "Going Out" Strategy
• The New Gold Standard: Will Gold Be Part of A Basket of Currencies Replacing the Dollar as World Reserve?
• Market Risks and Challenges That Lay Ahead in the Second Half of 2010
• The US Will Never Again Run A Balanced Budget

• 4 Tips to Getting Bad Debt Under Control
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• Income Re-Distribution Features of the 2009 Stimulus Plan

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