US – Deeper Budgetary Hole

April is usually a windfall month for the Federal Treasury, with big budget surpluses the norm as money floods in. However, for the first time since 1983 the Treasury ran a deficit in April. It racked up $20.9 billion in red ink - worse than the Congressional Budget Office had forecast. This was a huge shift from a year earlier, when Treasury recorded a surplus of $159.3 billion.

In short, Uncle Sam spent money he didn't have! And, you don't need a Ph.D. in economics to know that's a recipe for disaster.
The budget deficit for the current fiscal year is now running at $802.3 billion. That compares to $153.5 billion this time last year. The administration was just forced to raise its 2009 budget deficit estimate to $1.84 trillion, up 5 percent from the outlook it shared just two months earlier. And the 2010 deficit estimate jumped 7.4 percent to $1.26 trillion. This means we're running a deficit equal to a whopping 12.9 percent of the U.S. economy ... the highest in 64 years!

I keep harping on these budget points because I'm convinced they have longer-term implications for the economy and interest rates. Investors may already be starting to rebel, in fact. The latest $14-billion auction of 30-year bonds bombed. Bidding was relatively weak and the Treasury had to offer much higher-than-expected interest rates to get buyers to step up to the plate. The government will have to sell $2.4 trillion in new bills, notes and bonds in fiscal 2009, according to UBS.

It causes interest rates to be higher than they otherwise would be, which may induce the American people to save more and foreigners to move funds into the United States. Capital-intensive industries may contract in the United States but expand wherever capital continues to be formed. American wage rates may fall while some foreign rates continue to rise. When foreign investors finally conclude that they have enough dollar liquidity and enough investments in the United States, the dollar must fall.

Hopefully some semblance of budgeting sanity will return to Washington ... before it's too late! You have a Congress that’s lost its fear of deficits, so it’s still going to be hard to turn the deficit around once the economy and tax receipts have recovered. Everyone is so interested calling the turn in the economy that they are missing the actual developments. It tells me a systemic risk event is coming simply from the projected federal deficit alone.