Friday, November 14, 2008


"First" of the Day: Record budget deficit for October

The federal government began the new budget year with a record deficit of $237.2 billion, reflecting the billions of dollars the government has started to pay out to rescue the financial system.

The Treasury Department said Thursday that the deficit for the first month in the new budget year was the highest monthly imbalance on record. It was far bigger than analysts expected, over four times larger than the October 2007 deficit of $56.8 billion, and more than half the total for all of last year.

—Martin Crutsinger reporting in "October budget deficit hits record of $237.2B"

John Brinkley gives another perspective on the size of the October deficit—

The U.S. budget deficit last month exceeded the shortfall for President George W. Bush's first full year in office, spurred by purchases of stakes of some of the nation's largest banks.1

The deficit is the difference between what the U.S. government takes in and what it spends.

What you should notice is a number so astounding that I'm thinking it must be a misprint—

Corporate income tax receipts fell to $81 million in October, from $6 billion a year earlier, according to the Treasury. Individual income-tax collections declined to $86.2 billion last month, down 10 percent from $95.6 billion a year earlier, the report showed.

I'm inclined to believe that number should read "$810 million," which would put it more in line with the AP report that states "Corporate income tax receipts fell by $5 billion." Still, even at $810 million that's a drop of 87%! If there is no clever accounting explanation for this number, we are doomed!

And it's not just the feds in the red. This story is being writ small in the budgets of most state and local governments.

Take little California. According to an editorial in the Sacramento Bee,

The collapse of Wall Street and rising unemployment have driven down tax receipts to levels no one could have foreseen. Income tax receipts are expected to be $7.2 billion lower than projected two months ago. Revenues from sales and corporation taxes are expected to fall by $3.2 billion.

What this means, practically speaking, is that the federal government will be bailing out state governments while state governments will be called upon to bail out local governments.

Of course the Chinese and the Arabs will in turn have to bail out the federal government by buying Treasury bonds—at least if they ever hope to see a dime of value in all those dollars we so cheerfully sent them in our quest for more oil and cheaper flag pins. Since they are more or less obliged to lend us back our money, surely they won't be so crass as to expect anything in return, do you think?

Oh, and the dollar

As the financial meltdown has gotten underway the dollar paradoxically has strengthened. This is not as strange as it seems. As investors looked for a safe haven for their money after they had pulled what was left of it from stocks, bonds, real estate, hedge funds and money markets, the only thing remaining with the slightest glitter was U.S. Treasury bonds.2 In other words, the demand for dollars shot up as the demand for U.S. exports took a dive.

The good news is that the U.S. is able to borrow dollars at a low rate of interest relative to other countries, since most believe that the U.S. is still the safest debtor around.

The bad news is that the U.S. is borrowing amounts that may well shoot into the trillions. This will encumber the U.S. budget for generations.

Since neither you nor I nor our descendants can work that hard, even if we wanted to, ultimately the U.S. will have to print more dollars to pay down the debt. And that means that sooner rather than later the value of the dollar will continue its decline.

You don't have to take it from me. A month ago America's favorite billionaire wrote an op-ed for the New York Times entitled "Buy American. I am." Acting as cheerleader for the American economy, Warren Buffett did his best to lift the spirits of the investing class—not to mention the value of the U.S. stocks he said he'd just purchased. His advice—that now is the time to buy into the depressed stock market—was trumpeted throughout the media.

But they didn't read Buffett's column to the end. There, in the next-to-last paragraph, was this

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

Most will read this as a testament of faith in the future value of the stock market. The Simply Appalling view is that Buffett knows where the dollar is heading—and it's a place he doesn't want to be.

Related posts
Something you should know about your dollars (4/24/04)
More comment on the dollar (10/11/04)
Yet more news about the dollar (and the global economy) (10/21/04)
Buying a used Mercedes (2/8/05)
Bubble of the Day (4/26/07)
Currency of the Day (7/23/07)
The Depression Chronicles – 1: Bankruptcies (4/19/08)
The Depression Chronicles – 5: Consumer spending (5/13/08)
Understatement of the Day: A failing economy and an ignorant public (5/26/08)
The Depression Chronicles – 6: Fall of the GDP (10/30/08)



1Most accounts of the deficit for October make no mention of the military's contribution. Only John Brinkley notes that "Department of Defense spending rose 16 percent to $66.1 billion from $57 billion." [back]

2I am ignoring, of course, the "gold bugs" who would have you think there is safety in streams and caves. If everyone took their advice and bought gold there would be a "gold bubble" the likes of which the world has not seen. Before the bubble burst your financial advisor would have gotten out and become very rich—in the fiat currency of his choice. [back]

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