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On Friday, October 12, 2012, the U.S. Treasury Department reported (pdf) that the U.S. Government had a budget surplus of $75.02 billion for the month of September. The bad news is the U.S. Government had a budget deficit of $1.1 trillion for the full fiscal year that ended in September.

All this borrowing by the government is supported by the Federal Reserve (Fed) holding interest rates extraordinarily low. Adding in the Fed's programs of quantitative easing to buy U.S. debt and expand the Fed's balance sheet gave the Fed its intended effect of "reflating the economy" by pushing asset prices higher. The exchange traded fund for Gold (GLD) gained 4.78% over the past year while stocks in the S&P500 (SPY) have surged over 21%.

(SPY is the exchange traded fund for the S&P500)

For the month of September 2012, the U.S. government had its second and largest surplus of the year. April 2012 was the other month in fiscal 2012 with a surplus of $59.1B. The remaining 10 months of fiscal 2012 showed a deficit.

Year

2012

2011

$B

$B

September Receipts

261.6

240.2

September Outlays

186.5

302.9

September Surplus (Deficit)

75.0

(62.7)

Data source

This shows the information graphically.

(click to enlarge)

This table calculates that the U.S. Government in fiscal 2012 borrowed about 30.8 cents of every dollar it spent in fiscal 2012.

2012 Year-To-Date

$B

$T

Year-to-date Receipts

2,449.1

2.45

Year-to-date Outlays

3,538.4

3.54

Year-to-date Surplus (Deficit)

(1,089.4)

(1.09)

Deficit as percent of Outlays

30.8%

The stock and bond markets took the news with mixed results

Friday all four major stock market index ETFs, (DIA, SPY, VTI and QQQ) and the Treasury Inflation Protected Security ETF were down, while the bond market ETFs not indexed to inflation (AGG, BND, LAG, SCHZ and TIP) were up.

Closing values for 10/12/12:

Ticker

Name

Price

Change

Yield

DIA

SPDR Dow Jones Industrial Average

133.11

- 0.02

2.44

SPY

SPDR S&P 500

142.89

- 0.47

1.93

VTI

Vanguard Total Stock Market ETF

73.04

- 0.30

1.99

QQQ

PowerShares QQQ

66.68

- 0.03

-

AGG

iShares Barclays Aggregate Bond

112.32

+ 0.09

3.54

BND

Vanguard Total Bond Market ETF

85.00

+ 0.06

3.51

LAG

SPDR Barclays Capital Aggregate Bond

59.16

+ 0.05

3.16

SCHZ

Schwab U.S. Aggregate Bond ETF

52.80

+ 0.12

-

TIP

iShares Barclays TIPS Bond

122.16

- 0.14

2.48

If this surplus is a sign of better times ahead, then the Fed could end its program of easing (QE3) sooner than expected . The term "don't fight the Fed" could mean sell or take profits sooner than we thought just days ago.

Bonds vs. Stocks

Currently the 10-year U.S. Treasury bond (Treasury rates at a glance) yields only 1.66% as investors continue to fear stocks and European debt for the relative safety of U.S. debt. DIA, SPY and VTI pay a dividend higher than the 10-year U.S. Treasury bond. This could change if the U.S. government continues to spend far more than it takes in and investors lose faith in getting paid back like we saw in Greece.

I doubt the U.S. will default on treasury debt but it will probably continue to dilute the value of the dollar by having the Fed print money to buy U.S. debt to keep rates artificially low. This will eventually lead to higher inflation so I own equities like SPY and the index fund version of VTI along with individual TIPS ( TIPS or Treasury-Inflation Protected Securities) and Series I Bonds( Current Series I Bond Rates and More about I-Bonds.)

Note, I am not saying massive inflation in the double digits is a done deal. It is possible the Federal Reserve will restore economic growth with QE3 and keep inflation under 5% because the job market is so poor. If you expect massive inflation, then you should also buy gold via its ETF GLD and/or premium quality real estate. Other than small amounts of gold I own in the event of an "Armageddon event," I went the route of premium real estate in the San Francisco Bay Area over gold since I enjoy living on my land more than I would enjoy looking at bars of gold, and it saves on rent. Top land here is now at all-time highs. I also bought and recommended in my newsletter investing in REITs, which have done very well and they pay a dividend.

In any event, you want to position your portfolio for moderate to massive inflation. For me, this means you want to have the majority in equities, real estate, inflation protected bonds and gold. I keep the cash in short term, FDIC backed instruments that lose a bit now to inflation, which is offset by gains in my other investments. If you want to fight the Fed and expect deflation, not my advice, then you should probably buy long-term U.S. treasuries.

Disclosure: I am long SPY and own the traditional index fund versions of VTI and VOO bought long ago in various taxable and tax deferred accounts.

Source: U.S. Borrowed 31 Cents Of Each $1 Spent In Fiscal 2012: Final Deficit Is $1.1 Trillion