The Congressional Budget Office on Tuesday predicted the budget deficit will rise... a $973 billion deficit...A rising deficit... the United States recorded a deficit of more... The deficit ... The largest deficit recorded
Such a leeeeeengthy quote, but this caught my eye. Can anyone enlighten me on the effects of the deficit? I see this on Wiki's Deficit Spending article:
For the public sector to be in deficit implies that the private sector (domestic and foreign) is in surplus. An increase in public indebtedness must necessarily therefore correspond to an equal decrease in private sector net indebtedness. In other words, deficit spending permits the private sector to accumulate net worth.
This is a turgid way of restating the accounting identity I keep referring to. That's two ways to say it; if you still don't get it I'll add this poetic method: When the government spends, the money goes into private pockets.
There's so much complaining about and fear of the deficit. Excessive deficit spending could lead to higher interest rates, loss of consumer confidence in the U.S., maybe a larger trade gap. Saying the deficit is too big by merely pointing at it's numbers doesn't make sense. There is no automatic threshold over which a problem occurs. This has to be done heuristically. That means we have to look at it's effects.
Is inflation out of control? Not even close.
What about the bond market, because this affects interest rates? Here you must look at both coverage and yield. Coverage is the ratio of bidders to securities offered. Prime brokers are required by law to submit a bid (more on this in a moment), but there are not so many of them to give good coverage, which is generally in the range of 2:1. Treasuries now have 4:1 or even 5:1. It's not an exaggeration to say that U.S. government securities are enthusiastically received. The other aspect is the yield. Prime brokers must bid, but that doesn't mean they have to bid high--if they don't want it they can low-ball it until it's attractive to them. Look at the rates on short term notes, what do you see? Zero point practically nothing. Does this look like rising interest rates?
What about a loss of investor confidence? Even with the lackluster performing economy the S&P has more than doubled since it's low during the recession.
I could go on, but I'm tired of this. Right now I think the deficit could double and we would not see substantial harm.