Obama, China & Our Budget Deficit

“Calling the Trend” Column, by George Leong, B.Comm.

Okay, are you sitting down? Get ready, but President Obama announced that the U.S. budget deficit would come in at a record $1.56 trillion, or 10.6% of GDP this year. The deficit in 2009 was about $1.41 trillion. That is a massive amount and well above the previous estimate of $1.35 trillion. The mounting deficit is even more concerning in light of the mounting debt of $12.32 trillion, or $40,000 per citizen. As I alluded to in a previous editorial, the national debt has increased at about $3.89 billion per day since September 2007.

The fear is that the weak financial position of the U.S. will put pressure on the demand for U.S. investable assets such as debt, stocks, and real estate. China, the largest buyer and holder of U.S. debt has been expressing concern towards the mounting debt and size of the deficits. If China decides to buy less U.S. debt, it could place pressure on the U.S. treasury to increase the interest rate offered. The reality is that China has increased clout in the U.S. due to its holding nearly $2.0 trillion in U.S. debt. Could you imagine if China decided to start selling off the debt? That could negatively impact the bond market. What I feel China will do is add less U.S. debt and look to diversify to other countries in Europe where the financial situation is not as bad.

President Obama has suggested that the deficit will begin to fall in 2011 to around $1.27 trillion, but, even so, it is a significant amount — and don’t forget the mounting national debt and related interest payments. Luckily, interest rates are low at this time, but once they reverse — and they eventually will — the associated interest will be massive.

The President will be looking at slashing some costs to cut down the deficit, but, given the continued fragile state of the economy, it could backfire. The reality is that the country faces financial hurdles going forward. Jobs creation will be a key going forward in trying to drive up consumer spending and the GDP. Only in this way can the economy hope to recover faster and help President Obama in his plans to reduce the deficit and increase government revenues. The problem is that if the global and U.S. economies struggle with minor growth, it will impact the hopes of President Obama. And we have yet to discuss the financial impact of the proposed healthcare plan that is under debate.

Make no mistake about it, the U.S. economy will continue to face some hurt going forward. President Obama can only do so much, but, as I said, he will need a lot of help from the global economies and domestic recovery.