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TheStreet Open House

Federal Deficit Is Down Now but Debt Is About to Explode

NEW YORK (TheStreet) -- The Congressional Budget Office has presented new estimates for the federal budget deficit for fiscal 2014, which ends on Sept. 30. The deficit is now projected to total $506 billion, down from earlier forecasts and down from the fiscal 2013 number of $680 billion.

The response to this news is very positive. For one, the numbers say that the deficit is heading in the right direction: down. And the deficit now is less than one-third of the deficit in 2009, the recent peak. Furthermore, it's a little less than the average deficit over the past 40 years.

Read More: 7 Stocks Warren Buffett Is Selling in 2014

The basic reasons for the decline are increased revenues coming in from the economic recovery, lower interest costs due to the continued security purchases connected with the Federal Reserve's quantitative easing, and lower Medicare expenses.

This is even with a lowered prediction for the growth of real gross domestic product, which was reduced from a forecast of 3.1% in February 2014 to 1.5%. These predictions are year-over-year estimates, calculated from the fourth quarter of 2013 to the fourth quarter of 2014.

It should be noted that estimates of second-quarter GDP reports were announced Thursday. Second-quarter growth was revised upward to 4.2% from 4.0%. But this figure represents the growth in the second quarter of 2014 from the first quarter of 2014. The year-over-year rate of growth of real GDP for the second quarter was only 2.5%.

So the good news is that the budget deficit is coming down.

However, within historical perspective, the average budget deficit from fiscal 2002 through fiscal 2009 was $305 billion. Thus, the fiscal 2014 budget deficit is 166% of this earlier average.

Read More: Your Retirement Will Probably Start Earlier Than You Want

The bottom line is that credit inflation is not over.

And the CBO projections going out through 2024 show that after the 2015 fiscal year, federal budget deficits should begin to rise again, with the deficit reaching almost twice the current deficit by 2022.

What is the major cause of this increase?

The average interest rate on the federal debt is currently 1.8%. The CBO is projecting that average interest rates will exceed 3.0% in fiscal 2019. These predictions include no recession and no periods of tight monetary policy.

So what should investors make of this?

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