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.
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.
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?
The CBO also calls to our attention that the public holdings of the federal debt are only 72.0% of the nominal second-quarter GDP number of $15.994 trillion. That is, the debt held by the public is around $11.6 trillion. Note that in 2001, the debt held by the public was only $3.5 trillion.
Total federal debt at the end of the fiscal year is $16.7 trillion. A large part of the difference between this number and the amount of debt held by the public is, of course, the Treasury debt held by the Federal Reserve System.
I have just focused on the past decade or so, but it is important to remember that the federal government has supported a policy of credit inflation since the early 1960s, regardless of which political party has been in control. The only exception to this picture was the 1998 through 2001 period, when the Clinton administration produced actual surpluses in the federal budget.
Otherwise, over the last 50 years or so, the federal government created massive amounts of debt and encouraged the private sector to do likewise. This credit inflation created an environment of increased risk-taking, increased financial leverage and increased financial innovation. The financial parts of the economy grew relative to the "real" parts of the economy. Sophisticated investors learned how to take advantage of increasing asset prices.
Even though budget deficits have fallen over the past couple of years, credit inflation is alive and well. Investors just need to understand how to use it to their benefit.
And with the federal debt increasing like this, the Federal Reserve is going to try to return to a "more normal" operating process and raise interest rates. How this will be done in a period with increasing federal deficits and a rising cost of the debt, as the CBO has projected, is unknown at this time.
In such an environment there will be lots of investment opportunities. They just may not be in areas that are currently conventional in nature.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.