Something just has not been sitting well with me about the budget numbers being thrown around. I went and did dome digging and what I found was just scary…..really scary.
First things first. Here is the analysis of the proposed budget:
CBO Analysis of Obama Budget
Here are the main assumptions (click to enlarge):
Note: I excluded anything past 2012 because projections over a year or two are rarely accurate much less 5 or more.
Those numbers, just do not add up to me, for instance:
1- Rising unemployment and a sharp increase in GDP
– Since 1950 (as far back as CBO numbers go) there have been 18 instances in which unemployment rose year over year. In only 5 of those 18 did GDP also rise that year. The average GDP swing was 1.9% vs the 5.3% predicted by the CBO for 2009/2010. Of those 5, only two featured years in which the base year was a negative number. 1974-74 rose from -.5% to -.2% and 1991-91 rose from -.2% to 3.3%.
Put another way, the dramatic GDP increase the CBO predicts will happen in 2009/2010 in spite of rising unemployment has no actual prescedent in the past 60 years.
2- Inflation:
– The CBO projects inflation to run at an annual average rate of .725% from 2009-2012. Again, since 1950, we have only experienced a single 4 year span of inflation averaging anywhere close to this number. That was 1953 to 1956 when it averaged .57%. Good news? Not really. The 1953-58 period also featured GDP falling from 5.9% to 1.3% while unemployment rose from 2.9% to 6.8%. Both of these scenarios run counter to current CBO projections of increasing GDP and decreasing unemployment over the same span.
Note: It is extremely important to note the 1950’s and 1960’s had very low inflation as a rule due to the US being on the gold standard. Government could not “print” money the way they do now. Since the US went off the gold standard in 1971, inflation has averaged 4.4%. So despite an unprecedented and almost unfathomable increase in the money supply (inflationary) from the Federal Reserve and US Treasury in the past 6 months, the CBO predicts inflation to run 17% of its historical average. Almost defies logic.
Other possible issues. Foreigners are already balking as buying US debt due to the non-existant interest rates is now pays. That will force the Fed to raise rates to fund that massive deficit. The result will increase mortgage rates, consumer loan and business credit rates, slowing growth. Warren Buffett has called the current US Treasury market the “mother of all bubbles”. When it pops (they always do) the Fed will have no option but to rapidly raise interest rates to stop the selling and entice buyers. That will be a severe drag on any recovery
3 replies on “CBO’s $1.8 Trillion Deficit Projection? Too Optimistic”
Make no mistake about it folks. We are in the equivalent of the first few months of WW2. Get use to working harder and paying higher taxes for the next several years.
The war started in december ’41 and it wasnt until ’65 that it was paid off….
Note that the ‘doubling of the money supply’ talked about much over the past 6 months is explosion in excess reserves at the Fed, NOT new dollars being printed. Until the recent announcement by the Fed to buy $300 B of Treasuries, that is. Reference H.3 data series at Fed. My theory is that the Fed now paying interest was the inducement for banks to shift over reserves to the Fed, which now acts as a clearinghouse for banks that used to lend to one another. Key relation that did not exist prior to October 2008 is the spread between one-day Treasury bills and daily interest rate paid by Fed as to supply of excess reserves to the Fed.
Would not get too excited about inflation explosion quite yet, since we are having more of a destructive problem with deflation than a corrosive problem with inflation at the moment. In time, the inflation hawks will be correct, but until then, reflation is necessary to end deflation-driven deleveraging.
dave,
i agree which is why i am questions inflation expectation so low for so long