Obama to Unveil $3.7 Trillion Budget

Today is the day President Obama submits his budget to Congress. Of course, the actual budget that finally passes will look quite different from what we see today. This may be the first major confrontation between the White House and the new GOP-led House of Representatives. Within the fight, the Tea Party will most certainly be applying pressure to House Republicans.

Looking at the budget, the numbers aren’t pretty. The budget will total $3.7 trillion. This year’s deficit is projected to hit $1.6 trillion, which would be the largest ever. That comes to nearly 11% of the economy.

According to the President Obama’s projections, the deficit will fall to $607 billion by 2015 which is still 3.2% of the economy. If there’s ever a time we need to get several quarters of 6% or 7% GDP growth, this is it.

The problem is that borrowing costs are starting to rise. Bloomberg somehow got hold of a Treasury presentation to bond dealers saying that interest expense on the debt will rise from 1.3% of GDP in 2010 to 3.1% of GDP by 2016. Higher interest costs, of course, make the budget outlook even worse.

The long end of the yield curve has risen substantially over the past few months. On Friday, the 30-year yield closed at 4.71%. Last August 26, the yield stood at 3.53%. I think it’s very possible that the bond market may play a role in any budget confrontation. The bond and currency markets can serve as virtual parliaments so even if the budget flies through Congress, the budget can still be effectively vetoed by investors. This is exactly what happened in Greece and Ireland.

Stay tuned; we’re about to see if our leaders are serious or not.

Posted by on February 14th, 2011 at 8:10 am


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