The Rising Tide of Red Ink

By the time President-elect Obama is sworn in on Jan. 20, 2009, the U.S. government will be one-third into fiscal 2009 (which began Oct. 1) and have already run up at least $600 billion in red ink for the year.

The deficit totaled $237 billion in October and, according to forecasts that will be released on Wednesday, another $171 billion was borrowed in November. (The Congressional Budget Office (CBO) does not fully account for TARP outlays and instead gauges the net present value and anticipated risk-adjusted return for those outlays, which is more modest than the total figure.)

The rising tide of red ink is due to a combination of weak revenues and high spending. Personal income tax quarterly installments appear to be down roughly 10% from year-ago levels, while corporate receipts are off by a far higher margin. The trend of weak government receipts and high levels of spending are likely to stay in place for much of the remainder of the fiscal year.

Many speak of a "trillion dollar deficit" this fiscal year, but a figure closer to (and it pains me to write this) $1.2 or $1.4 trillion is not out of the question if all of the contemplated stimulus plans are enacted.

If we were speaking solely of the interest costs on that tab, the $40-$60 billion appears to be manageable. But that interest figure is an annual bill from here on out, on top of the more than $400 billion we are already paying annually on our previously accumulated deficits. By the end of the current fiscal year, the U.S. will be paying out almost one-sixth of its $3 trillion budget in interest every year.

Aggressive moves to reignite the economy in 2009 have received broad consensus, but you can also expect to hear deficit alarms go off later in the year. At that point, the Obama administration will need to start spelling out plans to get our budget back into sync.

---

David Sterman has been an equity analyst and financial journalist for 15 years, most recently serving as Director of Research at Jesup & Lamont Securities.