Trillion-dollar Budget Deficits…Getting Used to the Norm

I was very confident I was going to be right about calling for a fifth consecutive year of trillion-dollar budget deficits, but I’m surprised myself at how quickly I would be proven right.

Just a few weeks ago, I commented on the Congressional Budget Office’s (CBO) forecast for budget deficits in future years. (See: Getting Used to Trillion-dollar Annual Deficits.) Again, I want to reiterate, this was not and still isn’t a criticism of the CBO, because it has to project budget deficits based upon the current laws and tax cuts in place.

At the time, I warned that the then 2013 budget deficit of only $585 billion was not going to materialize. The only way this number could be reached would be if taxes increased dramatically, which, considering such a weak economy, was not going to transpire…is what I argued. When President Obama released the budget this week, he asked Congress to extend the payroll-tax cut and the unemployment insurance benefits until the end of 2012.

 Should President Obama win the election and his budget pass into law (highly unlikely), then the projected budget deficit for 2013 will be $901 billion. Compound this with the 2012 budget deficit now expected to come in at a worse level than previously projected of just under $1.3 trillion from a previous estimated $1.1 trillion.

 Since the 2013 budget deficit has now moved from $585 billion to $901 billion, I’m sticking to my forecast of the budget deficit for next year surpassing the $1.0-trillion mark by a large margin.

The proposed budget sees the top individual tax rate rise to 39.6% from 35%. The budget would treat dividends like regular income and remove other tax benefits from the wealthy. (There is no way that Congress is going to approve such a spike in taxes.) While the budget acknowledges that Medicare spending will increase dramatically from 2013 and on, it offsets this by saying that defense spending will fall.

The defense spending cut has a lot to do with closing out the campaign in Afghanistan, but the tensions with Iran have been escalating dramatically. A war with Iran could throw these budget deficit projections right out the window.

The Republicans will release their recommended budget soon. They are going to target different tax cuts and revenue priorities, so both parties will debate their philosophical approaches to the electorate on how to best move forward in this country.

 What is frightening is—I’m almost certain—that no matter what budgets and tax cuts either party presents, neither will prevent annual trillion-dollar budget deficits in the next few years. They’ll say they’ll tackle the issue, but, in future years. (Stop me if you’ve heard that one before!)

All I know is that taking the budget deficit projections in this budget right to 2016, and giving myself an error cushion of just five percent on the budget deficits, will ensure that our debt-to-GDP will be roughly in the vicinity of 130% by the end of either President Obama’s second term or the new President’s first term. Welcome to Greece…

 These unprecedented trillion-dollar budget deficits mean more money printing and a continued rise in the price of gold bullion and will certainly put upward pressure on interest rates…faster than we can imagine. Protect yourself, dear reader. (Also see: Could the U.S.’s Credit Rating Be Downgraded Again)

 Where the Market Stands; Where it’s Headed:

I wrote yesterday morning about how I was getting uncomfortable with so many stock advisors turning bullish and—bang—the Dow Jones Industrial Average has its worse day of the year, down almost 100 points yesterday.

Dear reader, we need to get ready for big one-day drops for the stock market. They will become the norm when Phase III of the bear market starts. But I still believe there is more life left in the bear market rally (or should I say sucker’s rally) that started in 2009.

 What He Said:

“Despite all my ‘yelling’ and ‘screaming’ about gold, I believe only a few of my readers and a small fraction of the general public have taken a position in gold. Why? Because gold’s not trendy…buying condominiums for investment is! If you are an investor, you need to seriously look at investing in gold stocks because gold bullion prices will likely continue to rise.” Michael Lombardi in PROFIT CONFIDENTIAL, September, 21, 2005. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.