macroblog

While it is gratifying to see a graph indicating a decrease in the rate of increase in the cumulative Federal budget deficit, the continuing rate of increase in trade deficit is much more fundamental. One speaks to the Federal government deficit while the other speaks to a looming economic deficit.

The real question is "how long the US can continue to consume an excess of goods, produced off-shore, and maintain a vibrant, balanced domestic economy?".

Macro-economic theory clearly predicts that, at the peak of an economic boom, the Federal deficit should decline. We can all take one breath that, finally, the rate of growth of the deficit has, at least temporarily, declined. Okay, back to the wait for the other shoe to drop.

Macro-economic theory also predicts that, should massive losses of high paying jobs and key industries to Foreign competition bring on a recession, the deficit will increase.

The trade picture is much worse than the deficit picture is better.

The deficit picture that takes a climb from mid 2003 may be based on revenues received from capital gains on RE, but that picture may be quite different with a sobering of house prices now under way.

Please be wary of the budget deficit numbers. They do not include deficits incurred by war spending on Iraq and Afghanistan. These are "off budget" items which are not show in the normal quarterly budget deficit numbers. Including this would spread out about $500B in deficit spending over the period from 2003-2006.