Saturday, March 21, 2009

The CBO Forecast

The Lehmann Letter ®

You can view the Congressional Budget Office’s (CBO) latest forecast for the federal deficit at .

The CBO’s earlier estimates of the 2009 and 2010 deficits were $1.3 trillion and $700 billion respectively. Now, without taking President Obama’s budget proposals into account, the CBO has revised its projections to $1.7 trillion and $1.1 trillion. That’s a $400 billion increase for both years. If, in addition, the President’s budget proposals are taken into account, the CBO’s projections rise to $1.8 trillion and $1.4 trillion.

You can see that the CBO believes the deficit will rise substantially, and that the deteriorating economy – not the President’s budget - gets most of the blame. The federal government collects less tax revenue and spends more whenever recession hits. The President’s budget adds “only” $100 billion to the deficit in 2009 and $300 billion in 2010.

But the situation becomes more dire going forward. The CBO estimates the cumulative deficit from 2010 to 2019 at $4.4 trillion before the President’s budget and $9.3 trillion including the President’s budget. That’s substantial.

Plugging these numbers into the following chart adds perspective.

Federal Deficit

(Click on chart to enlarge)

(Recessions shaded)

Trillion-dollar deficits are a new addition, and a stunning one at that. But an examination of the next chart helps our understanding of the role those federal deficits will play.

Private Borrowing

(Click on chart to enlarge)

(Recessions shaded)

Private borrowing is now a negative figure – for the first time since WWII. The private sector is repaying its debts instead of initiating new loans. That’s serious because our economy has come to depend on ever-larger private borrowing – think mortgages - to finance its growth. Now that the private sector has shriveled, the federal government must fill the gap.

If federal borrowing and spending does not offset the collapse of private borrowing and spending, the recession will become much worse than it is already.

(The charts were taken from [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2009 Michael B. Lehmann

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