The Paradox of Deficits May 23, 2009
By John Mauldin
Things That Go Bump in the Night
A Trillion Dollars as Far as the Eye Can See
The Global Recession Gets Worse
Where Will the Money Come From?
The Paradox of Deficits
Naples, London, and Eastern Europe
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From ghoulies and ghosties
And long-leggedy beasties
And things that go bump in the night,
Good Lord, deliver us!
–Old Scottish Prayer
There is something that is bumping around in my worry closet. The bond market is not behaving as if there is deflation in our future, and the dollar is getting weaker. Unemployment keeps rising, but most of all, the US government deficit looks to be spinning out of control. This week we look at all of this and take a tour around the world to see what is happening. There is a lot of interesting
material to cover.
But first, I am proud to announce that thanks to your donations the net proceeds from the Richard Russell Tribute Dinner totaled $17,000! A donation was made in that amount to the Autism Society of America, San Diego County Chapter, in Richard Russell’s name.
The evening was captured in both video and photographs, and we would like to share those with you. We have put together a DVD that captures all the wonderful moments, including tributes from Richard’s longtime friends and family, an entertaining skit by Richard’s daughter Daria, and another touching tribute by Richard’s daughter Betsy. Perhaps the best speech, however, came
from Richard himself — which is of course included on the video. For those who could not attend in person, we have already made copies of the video and will mail it to you as soon as you order it. The cost is $29.95, and that includes shipping. You may order as many copies as you like.
To order the video, please visit: http://www.johnmauldin.com/russell-tribute-dvd.html
The photographs were placed on Shutterfly, an online gallery where you may view them and choose the ones you would like to order. We have created a web page specifically for these photos. To access that page, please use this link:
http://richardrusselltributedinner.shutterfly.com or you can link from the page above. Now, let’s jump right into the letter.
A Trillion Dollars as Far as the Eye Can See
As of this week, total US debt is $11.3 trillion and rising rapidly. The Obama
Administration projects that to rise another $1.85 trillion in 2009 (13% of
GDP) and yet another $1.4 trillion in 2010. The Congressional Budget Office
projects almost $10 trillion in additional debt from 2010 through 2019. Just
last January the 2009 deficit was estimated at “only” $1.2 trillion. Things
have gone downhill fast.
But there is reason to be concerned about those estimates, too. The CBO assumes a
rather robust recovery in 2010, with growth springing back to 3.8% and then up
to 4.5% in 2011. Interestingly, they project unemployment of 8.8% for this year
(we are already at 8.9% and rising every month) and that it will rise to 9%
next year. It will be a strange recovery indeed where the economy is roaring along
at 4% and unemployment isn’t falling. (You can see their spreadsheets and all
the details if you take your blood pressure medicine first, at
www.cbo.gov.)
Just a few quick thoughts. This year the proposed administration plan is to borrow 50% of every dollar spent. The CBO projects than nominal GDP will grow by about 50% over the next 10 years (which is historically reasonable), but also that revenues will double, which suggests massive tax increases in relation to GDP. Interestingly, the International Monetary Fund says growth next year will be tepid at best (more below). The deficit in 2010 is almost 10% of GDP. The average proposed deficit is almost a $1 trillion average for the next ten years. Ten years from now, the deficit is projected to be $1.2 trillion. And that is if government costs do not go up and inflation only averages 1.1% for the next six years.
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