Despite First Budget Surplus Since 2008, U.S. Still Borrows 34 Cents Of Every Dollar Spent

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 |  Includes: AGG, BND, DIA, LAB, QQQ, SCHZ, SPY, TIP, VTI
by: Kirk Lindstrom

In March 2012, the U.S. Government had a budget surplus of $59B, the Treasury Department reported. This is the first monthly budget surplus since September 2008.

I have certain rules I live by. My first rule: I don't believe anything the government tells me.
-- George Carlin in the 1992 HBO special "Jammin' in New York"

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The total budget deficit for the first seven months of fiscal 2012 fell to $719.859 billion.

Summary of two charts:

Fiscal Deficit (amount borrowed) as a percentage of spending = 34.2%

Year

2012 2011
April Receipts $318.807B $289.543B
April Outlays $259.690B $329.929B
April Deficit -$59.117B $40.387B
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The stock and bond markets took the good news in stride with mixed results:

Three of the four major stock market index ETFs, (DIA, SPY, VTI and QQQ) were up on the news, while the bond market represented by five major index funds (AGG, BND, LAB, SCHZ and TIP) were all down on the news.

Ticker Name Price Change Yield
DIA SPDR Dow Jones Industrial Average 128.43 0.09 2.44
SPY SPDR S&P 500 135.97 0.23 1.93
VTI Vanguard Total Stock Market ETF 69.83 0.18 1.99
QQQ PowerShares QQQ 64.19 -0.13 -
AGG iShares Barclays Aggregate Bond 110.70 -0.12 3.54
BND Vanguard Total Bond Market ETF 83.89 -0.05 3.51
LAG SPDR Barclays Capital Aggregate Bond 58.34 -0.06 3.16
SCHZ Schwab U.S. Aggregate Bond ETF 52.00 -0.17 -
TIP iShares Barclays TIPS Bond 119.32 -0.02 2.48
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Perspective:

I think these deficit numbers are too large for most people to comprehend, so I will divide them by a billion (1,000 million) to put them in perspective.

Lets say your kid graduated from college and their monthly pay check after taxes is $1,383 and their living expenses "worthy of someone of his education and status" total $2,103 a month. Would you tell the kid to:

  • Not worry. Keep charging everything on credit cards and let your grandkids pay the bills someday. (This is what we currently do in the U.S. with our national debt.)
  • Demand your boss give you a raise to match your education and status. (This is what people do when they say they want to raise taxes.)
  • Cut spending. (Nobody wants to do this. We're not Greece!)

I'd suggest the kid cut spending and work harder so the boss will give them a raise so they can someday afford what they want. Hopefully the U.S. government can reach a compromise that both cuts spending and raises revenue without killing the economic recovery.

How I Invest Using this Information:

I am long SPY and the mutual fund versions of both SPY and VTI. I also own individual TIPS. I believe the US will continue to print money to kick the can down the road hoping to inflate away the problem. The above investments should all do well with low to moderate inflation.

Dividends for SPY should go up to match inflation and the prices should go up with earnings growth which I expect to be on average positive over the next decade. I believe inflation will hurt bond funds when interest rates normalize. Individual investors continue to pour money into bond funds. I'd rather be early leaving bond funds to avoid risk of being trampled in the stampeed as individuals leave bond funds when rates rise. I bought individual TIPS when they were out of favor with a very large premium to inflation, so I hold these and collect very nice interest payments.

Disclosure: I am long SPY.