So we're looking at a $500 billion federal budget deficit, at least, in 2009, according to White House sources in published reports. None of this will be news to regular Capital Commerce readers. A few thoughts on this:
1) Neither presidential campaign anticipated this back in early 2007 when they were cooking up their economic agendas.
2) This huge deficit number does not include the cost of any further housing bailouts, such as a $500 million-to-$1 trillion buyout of bad mortgage debt. (It may well be coming, folks.)
3) If Barack Obama is elected, I still believe—this is after talking to his advisers—he is going to try to push through his full energy and infrastructure spending agenda with the help of overwhelming congressional majorities.
4) Why should either president care about what bond investors think about big deficits when Bill Gross, the most famous bond manager on the planet, says a President Obama should run trillion-dollar—yes, trillion—deficits to boost the economy? As he put it in his monthly newsletter:
Due to higher unemployment and energy costs, domestic consumption will soon be $300 billion less than it should be if we are to return to historical economic growth rates. According to that old C + I + G formula (scratch the trade deficit for now) when C + I is reduced by $500 billion, then G should increase by that amount in order to fill the gap. The G, Sir, is you—the government deficit, the fiscal stabilizer popularized by Keynes following the Depression. And since the fiscal deficit for 2008 is likely to press $500 billion even before you take the oath of office, well there you have it: $500 billion + $500 billion = $1 trillion big ones, probably by sometime in 2011 or so. It takes time to spend those types of bucks.
5) Yet there are analysts who think that big deficits will severely limit Obama's spending plans. This from a recent blog posting on the topic:
So what will bond investors think, since they kinda-sorta have an impact on interest rates? Greg Valliere of the Stanford Group recently made the following point to me: "Obama is going to be totally hamstrung by the deficit.... I am shocked about how oblivious people are to the budget deficit."
While Obama's folks are talking about a deficit goal that is about 2.5 percent of gross domestic product or lower for the first term, Valliere thinks Uncle Sam will be running deficits that are 3 percent of GDP or higher in coming years. (We have not consistently run deficits at those levels since the early 1990s.) And if that ratio starts approaching 4 percent ($500 billion banking bailout, anyone?), "the bond market will send a nasty message."