The Congressional Budget Office (CBO) has looked at the future and it is not so good. We face enormous budget deficits far into the future. This chart compares an earlier CBO estimate with a more recent one based on new information from the President’s Budget. The lighter blue bars tell the tale:
Source: Congressional Budget Office
Here is some additional — sobering — information from the report [emphasis added]:
Preliminary Analysis of the President’s Budget (Congressional Budget Office, Director’s Blog, Mar. 5, 2010, Douglas Elmendorf)
CBO's preliminary analysis (incorporating contributions from the staff of the Joint Committee on Taxation) indicates the following:
Debt to reach 90% of GDP
This estimate of Federal debt held by the public reaching 90% of GDP is something that should concern us. In their book, THIS TIME IS DIFFERENT (Eight Centuries of Financial Folly, Princeton University Press, 2009), Carmen Reinhart and Kenneth Rogoff make two critical points:
…If there is one common theme to the vast range of crises we consider in this book it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risk that it seems during a boom…
…Although private debt certainly plays a key role in many crises, government debt is far more often the unifying problem across the wide range of financial crises we examine…
And, the number they peg as being very serious is debt at 90% of GDP. Once debt hits that level, a serious financial crisis is much harder to avoid.
As investors, whether in stocks or bonds or real estate, the financial soundness of our national balance sheet is of critical importance. Maintaining that soundness is all about keeping expenditures well below tax revenues in good times so that budget cutbacks don’t have to happen in recessions. Unfortunately, we the people, and our representatives seem to have forgotten that basic fact, at the local, state and national levels.
Now, we are in a recession so cutting back is very difficult. One we come out of this downturn, we should be focused on ways to cut spending and debt. My gut feeling tells me that our fearless — about spending our money — leaders will not willingly do that though.
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Kurt Brouwer is a fee-only financial advisor with three decades of experience. He is the chairman and co-founder of Brouwer & Janachowski, LLC. Kurt has written books, articles and hundreds of blog posts on mutual funds, ETFs and other investment topics. E-mail: kurt.brouwer *at* gmail.com.
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