Investment Contrarians

Budget Deficit Soars in October; Do You Trust the Politicians to Solve This Looming Crisis?

By for Investment Contrarians |

Budget Deficit SoarsThe U.S. Treasury Department recently released the budget deficit numbers for October, reporting a massive $120 billion deficit. This compares to a budget deficit in October 2011 of “only” $98.0 billion. While the U.S. economy is not growing at a rapid rate, it’s certainly not shrinking. So in the span of one year, with some growth in the U.S. economy, albeit slow growth, we’ve seen an approximate $20.0-billion monthly year-over-year increase in the budget deficit. I think this shows the true ineptitude of our political leaders.

One sign that the U.S. economy has shown some improvement is that receipts increased to $184 billion, compared to $163 billion this time last year. However, expenditures increased at a much faster rate. The monthly expenditures for October 2012 were $304 billion, a huge jump from approximately $262 billion in October 2011, which caused the rise in the budget deficit. Does anyone know where this money went?

While President Obama can talk about increasing taxes to generate more revenue, the truth is that receipts to the government are increasing. The government is taking in higher levels of revenue, as the U.S. economy has slightly improved. However, the spending side is growing at a far greater rate. I don’t believe Obama’s tax hikes can pay for the massive increases in expenditures. More likely, raising taxes to try and reduce the budget deficit will kill what little growth the U.S. economy is experiencing.

October is the first month of the fiscal 2013 year. The fiscal 2012 year has ended with another budget deficit in excess of $1.0 trillion. One trillion dollars is larger than the entire gross domestic product (GDP) levels of many countries, and we’re throwing around this money year after year, with no end in sight. Even as politicians talk about reining in the budget deficit, the evidence shows that spending continues to grow massively.

Now, there are some specific times during a financial crisis within the U.S. economy when there can be some justification over the very short term to run a budget deficit to try to prevent a systematic collapse. However, this does not mean that the budget deficit should be continuously run for years on end to try to artificially inflate the U.S. economy. That has never worked before, and it will never work in the future. For those who believe running a budget deficit is crucial to a successful U.S. economy, I would point to the economic records of other countries running a large budget deficit, such as Greece, Spain, and Italy.

The U.S. economy cannot continue down the path of running a large budget deficit forever. At some point, someone has to pay the bill. While no one wants to see the extreme cuts of the fiscal cliff enacted all at once, as that type of shock would be very severe to the fragile U.S. economy, a gradual implementation of reduced spending over time can work without having adverse effects. Either we rein in the budget deficit over the next couple of years or, eventually, the international markets will force us to do so.

Talk is cheap. All I see in the data from the government itself is that it is continuing to spend massively, but we are getting little in return. Politicians are just pandering to potential voters, and our children will be the ones to pay the price.

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