How Projected $490 Billion US Deficit in 2009 Will Impact Everyone

The US budget deficit is expected to grow to $490 billion in 2009 from an estimated $400 billion this year. This huge and growing deficit will put further pressure on interest rates and constrict the next President's economic policy.

A Bloomberg article about the deficit states:

"The bigger shortfall for fiscal 2009 may reflect dwindling tax receipts because of the U.S. economic slowdown, the cost of payments distributed under the $168 billion economic stimulus package and the continuing cost of the wars in Iraq and Afghanistan."

No one is talking about the deficit these days but they should. The government owes 9.5 trillion dollars and debt is growing at 1.77 billion per day.

The impacts of this are higher interest rates as the government needs to borrow more money to finance the debt. This competition for money pushes up overall rates. It also increases our dependence on foreign countries, as foreign central banks are big buyers of treasuries. China is a particularly big buyer and there has been mounting concern about what will happen if China decides to dump its treasuries (not that it can do so easily).

This is also results in the decline of the dollar as the government debases the currency by issuing more debt and increasing the money supply to pay for it. While the money supply may be increasing, the value that underlies that money isn't, and as a result each dollar becomes worth less. That's why the value of the dollar is dropping. It's also why many individuals think that a return to the gold standard will end such debasement. The reality is, debasement occurred when there was a gold standard.

Until we are willing to get serious about curtailing spending and getting our financial house in order, we'll continue to suffer from the consequences of fiscal irresponsibility.