Getting Used to Trillion-dollar Annual Deficits

The U.S. Congressional Budget Office (CBO) just released its latest report on its projected budget deficits for the next 10 years.

Under current laws and tax policies, it foresees a budget deficit in 2012 for the U.S. government of $1.1 trillion. This is based on GDP growth of two percent. In 2013, the CBO expects the budget deficit to shrink significantly to $585 billion; based on the assumption of GDP growth of just 1.1% (I’ll believe it when I see it).

What is shocking is that we are going to have another trillion-dollar budget deficit this year, as government debt in this country continues to climb at an alarming rate. That means that the debt ceiling, right after the election, is going to have to be increased again.

A ceiling of $16.394 trillion currently and counting!

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 Furthermore, if we take the GDP forecasts from the CBO, which I believe could be optimistic, then how does the budget deficit supposedly shrink to just $585 billion in 2013 with GDP of just 1.1%? The answer is the expiration of tax provisions.

 If current tax breaks are eliminated, then Federal Tax Revenues are:

 $2,302 trillion—fiscal 2011 (actual)

$2,523 trillion—fiscal 2012 (estimate)

$2,988 trillion—fiscal 2013 (estimate)

 That means that, in just two short years, taxes in this country will increase 30%(?).

 I’m not criticizing the CBO. They are going by the laws currently in place, and projecting budget deficits accordingly. What I want to point out, dear reader, is that, with GDP growth of two percent this year and 1.1% next year, how is the current or newly elected administration going to allow these tax provisions to expire?

With the average American in dire straits and the economy weak, will the Bush era tax cuts not be renewed? Will all of the other benefits that were enacted because of the financial crisis be allowed to expire—in spite of government debt—when we haven’t come out of this extended recession/depression?

 I’m contending that the U.S. is not Europe and that the current/new administration will continue past policies. I believe these tax breaks will not be allowed to expire. Should that be the case, we are going to face another trillion-dollar budget deficit in 2013.

Time to raise the debt ceiling yet again…

As if that were not dire enough, the CBO admitted that, even under its most conservative estimates, the costs of Medicare, Medicaid and other healthcare programs will double over the next decade to at least $1.8 trillion a year, placing an incredible strain on the budget deficit.

 The CBO itself warns that these costs, combined with Social Security, at current estimates, are not sustainable in the longer term. Revenues need to increase substantially to offset this government debt or the budget deficit will balloon out of control.

 Is it any wonder that the Federal Reserve took drastic steps just a few weeks ago, saying it will keep interest rates near zero until late 2014? The economy needs to grow again so that the tax breaks can be rescinded and tax revenues can grow again, thus resulting in shrinking budget deficits and government debt. Right now, this scenario is facing a steep, uphill climb, because growth is nowhere to be found.

 Be wary of the recent stock market rise. We are witnessing a bear in sheep’s clothing. I continue to believe that the only viable insurance against the above numbers consists of gold bullion and the undervalued gold mining shares. (See: Gold Stocks: There’s Value in Them There Hills.)

 Where the Market Stands; Where it’s Headed:

 For the benefit of my new readers, here is where I believe we are with the stock market, the big picture:

 A 25-plus-year bull market in stocks ended in October of 2007. At that point, a secular (which means “long”) bear market was born. By March of 2009, Phase I of the bear market was over (bear markets have three phases), as stocks had fallen 55% from their October 2007 high.

 The bear market entered Phase II in March of 2009 and that’s where we are now. A Phase II bear market is a rally in the confines a secular bear market. It’s when stock prices rally from oversold levels. It’s when the bear market tries to lure investors back into stocks by giving investors the impression that all is well with the economy and stocks are safe again. Phase II bear markets tend to last three to four years.

 The next phase of the secular bear market is Phase III. That’s when investors are caught off guard because everything looks rosy, but stock prices start to decline. Phase III bear markets bring stocks back down to the level where the Phase I bear market started, in this particular case, 6,440 for the Dow Jones Industrial Average.

 That’s why I keep telling my readers: Enjoy this bear market rally while it lasts, because it’s not permanent.

 What He Said:

 “Investors have been put into an unfair corner. Those that invested in stocks because they got caught in the tech boom (1999) have seen their investments gone. Now, those that have leveraged heavily to play the real estate game, because it is the place to be (2005), could see the same fate as the stock market investors. Thanks again, Mr. Greenspan.” Michael Lombardi in PROFIT CONFIDENTIAL, May 27, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.