Federal Deficit Could Soar to $1 Trillion in 2009

Remember the law of the conservation of energy from physics class? It says that the total energy in a system remains constant. It may be converted from one form to another, but it is neither created nor destroyed. The same thing is true of the debt of this country. What we are witnessing is the massive conversion of mortgage, credit card, etc. debt from the balance sheets of corporations, and banks specifically, to the balance sheets of the public.

As banks write down the value of their mortgage backed loans and derivatives, they are taking fresh capital from the U government, capital that is allowing them to lend again. But the bad debt doesn't exactly disappear. It becomes converted into US government debt that is financed via the sale of treasury bills.

Today, the US has a budget deficit of over $10 trillion dollars, or more than $30,000 for every man, woman, and child living in the United States.

The WSJ is reporting today that this deficit (how much more we spend than we bring in every year) could be as much as $1 trillion next year, or 10% of the public debt (the total amount the government owes).

" As bad as 2008 was, the current fiscal year, which began Oct. 1, is widely expected to be far worse. The director of the Congressional Budget Office recently estimated the annual deficit could hit $750 billion given the potential impacts from a possible recession and the financial markets' problems. Some private economists put the 2009 deficit at as much as $1 trillion."

We are a rich country and this does not bankrupt us, but such a huge and ballooning debt will cause problems. It will crowd out capital as the money to finance this debt increases. Today, the interest on the national debt is one of the largest budget items. It will also make us more dependent on foreigh countries that have the cash to finance our deficits. These countries will gain increased economic clout.

This situation will not get any better. With a wave of baby boomers entering their retirement years, entitlements and other programs that make up a significant chunk of the budget will not decrease, but increase. Our finances will not get better, but worse.

It's time someone realizes that there is no magic bullet and that we as a nation must learn to pare back debt in all of its forms. Sweeping it under the rug doesn't make it go away.