Money And Banking American Budget Deficit

Money and Banking: American Budget Deficit

Introduction

Our country’s fiscal condition is in a critical state. On August 25 this year, the congressional budget office drove this fact home when it released its budgetary approximations. The office was of the view that within the next decade, the country will accumulate deficit amounting to about $7.137 trillion. The case could be worse, given the fact that this office has been known before to make approximations that were way out of the reality.

A huge portion of this deficit is made up of uncontrolled federal spending, especially in the Iraq and Afghanistan aggression. A half of this debt derives from the fact that the expected revenue that the government hopes to collect is low. This has been brought about by the struggles that the economy is currently undergoing and increased interest rates as the government struggles to service the national debt.

The above scenario means that future congresses and administrations will have to come up with ways to address these huge deficits. For instance, the Obama administration has proposed cuttings in government spending as one of the responses. The deficits that the congresses and the administrations have to respond to within the next decade are both formal and off balance sheet. This paper is going to present the assumptions of the writer and his views as to how future congresses and administrations are going to respond to this debt. The demand outlook for the economy will also be analyzed.

Means of Responding to Formal and Off Balance Sheet Deficit

Money and Banking: American Budget Deficit

The chart represents the actual and projected deficit for the next one decade. From the chart, it will be obvious that unless something is done soon, American fiscal policy will be affected beyond repair.

Chart 1: Projected and Actual Deficit Estimates

Source: www.heritage.org

Borrowing is one that the administration and the congress can use to respond to the deficit. Brisley (2009) is of the view that the government will have to borrow about $1.7 trillion this year alone to plug the deficit on proposed spendings. This means about $5 billion daily.

Another response is more stimuli spending (Schifferes, 2009). According to White House economist Paul Krugman, this stimulus will improve the economy and in the long run, the government will be able to recover its deficit (Brinsley, 2009). However, this suggestion has been received with a measure of disdain from some quarters. There are those who feel that it will be absurd for the government to add anything above the $787 billion that Obama has already committed (Schifferes, 2009).

Tax increase has been proposed as one of the ways to raise money and recap the deficit (Ciamfocca, 2009). This proposal has been made by none other than the president himself. However, this increased taxation may backfire because it might not be able to handle the massive spendings proposed by the same man. The interest rates will be a way to counter inflation. Currently, it stands at 0.25% (Ciamfocca, 2009).

Money and Banking: American Budget Deficit

There are likely to be price increases in the short term. This will be brought by inflation as the government tries to recover the deficit. However, this inflation and prices will fall as the government clears its debt. For example, currently, the government is in dire need of somebody to buy its debt (Brinsley, 2009). If this does not happen, it will be left with no option but to print more money. This printing of more money is what will raise inflation rate and eventually average price levels (Brinsley, 2009). This is perhaps why there has been such stiff opposition to Obama’s plan on bail out. This plan means that the government will have to print more money, raising inflation and increased average consumer price levels. In August 2009, inflation rates were expected either to fall by 0.3% or to increase by 0.6% (Schifferes, 2009). Brinsley (2009) is of the view that this trend will continue in the long term, but he is assured that it will not exceed single digit. The following chart will aptly put this point across.

Source: missourieconomy.org

Another task that the administration and future congress will have to do is encourage private investment. This private investment will take away most of the operations from the government. Private sector is renowned for its ability to turn around fledgling government investment into profitable entities (Ciamfocca, 2009). These entities pay tax to the government, and hence the government will have improved source of revenue.

However, the current economic crisis has eroded the confidence of private investors in America (Brinsley, 2009). This was made worse by the fact that one of the actions that the administration took in an effort to turn around the economy is acquire most of the private companies that have run into problems.

The dollar is currently one of the most valued foreign currencies. It exchanges favorably with other world currencies like Japanese Yen and Australian Dollar. However, the current crisis has seen the faith that most people around the world had on dollar shaken (Brinsley, 2009). This is especially following the trend where American dollar has been losing its value since 2001. Between then and now, it has shed more than 3% of its value (Ciamfocca, 2009). Also, a lot of

Money and Banking: American Budget Deficit

American dollar are held in form of bonds at some foreign central banks. This puts the value of the dollar at stake if these banks happen to be attacked by terrorists or anything happens to them. Also, these central banks can embark on a selling spree to get rid of the American dollar. This will flood the market with the dollar, making it lose its value (Schifferes, 2009). There has been a move by some banks to invest in gold bullion instead of the dollar (Ciamfocca, 2009). For example, China’s central bank has embarked on such a venture (Brinsley, 2009). If this trend catches on, the value of the dollar will be negatively affected.

Conclusion: Expected Outcomes in the Next Ten Years

Given the above scenario, it is very hard to come up with a rosy picture of the future. According to Brinsley (2009), if the current trend is sustained, the percentage of US debt to the country’s GDP will be staggering. Brinsley puts it at 8.5% of GDP (2009).

The savings of the American citizenry will also decrease drastically. This is because they will have less to spend, leave alone to save. This is if the taxation that is been proposed is put into place (Schifferes, 2009). The ambitious and somehow reckless spending that the government wants to embark on will be financed by the public’s taxation, and as such, savings will fall.

In 2001, the public’s debt formed 33% of GDP (Ciamfocca, 2009). However, this will drastically change by the year 2019. The total debt of the citizenry will make up 68% of the GDP (Ciamfocca, 2009). This is compared to the aforementioned government’s debt of 8.5% GDP (Schifferes, 2009). The dollar is also likely to weaken against other currencies. This is if the current currency hedging that is been undertaken by central banks around the world continues. The demand for dollar will decline, and as such, its value.

Money and Banking: American Budget Deficit

Money and Banking: American Budget Deficit

References

Brinsley, H. L. (2009). Macroeconomics and the American economy. New York: McGraw-Hill, 345.

Ciamfocca, G. B. (2009). “US budget deficit is more serious than we know.” The Economist, 23( 9), 23-25.

Schifferes, C. X. (2009). “The current economic crisis and American economic future.” Washingt

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