Seeking Alpha
Profile| Send Message|
( followers)  

Two things happened the week before president Obama released his proposed 2011 budget today. First, in his State of Union address, Obama promised a three-year freeze on domestic spending. Almost simultaneously, the U.S. Congress raised the national debt ceiling by $1.9 trillion to $14.29 trillion. When it comes to politicians, investors would be wise to watch what they do and pay no attention to what they say.

There is no reason to believe that the U.S. spending orgy that was ratcheted up with the Credit Crisis is going to be controlled now, next year, the year after or the year after that. The 2011 fiscal year begins October 1, 2010. Obama's proposed budget includes $3.83 trillion in total spending and an estimated deficit of $1.27 trillion. The deficit would be much worse if the Bush tax cuts didn't expire at the end of 2010 and a proposed $90 billion tax on big banks wasn't being factored in. Higher taxes are Obama's approach to controlling the deficit, not less spending - and he is going to be raising taxes much higher if any deficit reduction is going to take place.

To be fair, President Obama only promised to control a small amount of the domestic spending part of the U.S. budget. This is estimated to be $447 billion, or less than 12% of 2011 spending. The biggest U.S. budget items -- military, social security and Medicare -- are not being frozen. No significant spending control is possible with this approach, but the public would never know it if they read the mainstream media headlines indicating otherwise.

The 2010 budget is also being affected by Obama's revised spending agenda. Last February, the 2010 budget deficit was supposed to come in at $1.2 trillion. In August, this was revised upward to $1.5 trillion. In a big news release, also just last week, the figure was lowered to $1.35 trillion. This allowed Obama to state that the deficit for 2010, the first budget Obama fully controlled, was less than the over $1.4 trillion in 2009. Well, that was last week when the cameras were rolling. Now that the State of the Union address is over, the 2010 deficit is now estimated at $1.56 trillion - almost $200 billion higher only one week later.

The U.S. national debt was an already huge at $8.95 trillion by the end of 2007, when the Credit Crisis began to unfold. It could easily get to the new debt limit of $14.29 trillion long before the 2011 fiscal year is even finished (the national debt can increase by much more than just the budget deficit because of accounting tricks played with inter-governmental money transfers). The United States has only two ways of paying for its budget deficits. We either borrow the money - almost all of which comes from foreign sources - or we print it. At some point our lenders are going to say enough is enough and then the printing press will be our only option. There will be no way limit how much inflation will exist once that happens.

Disclosure: None

Source: Inflation, Deficit Spending and the 2011 U.S. Budget