Dissecting The U.S. Deficit

Includes: TLT
by: Katchum

The U.S. federal government recently recorded for February 2012 its worst budget deficit yet. When talking about deficits, a differentiation needs to be made between current account deficits and budget deficits. The current account is the sum of balance of trade (exports minus imports) between the U.S. and foreign countries. Today, the U.S. is posting a current account deficit that lies around $US 500 billion/year.

The budget deficit, on the other hand, is the difference between government tax revenues and government spending (social security, pensions, medicare, etc...) and has been exploding since 2008.

Here lies the real problem. The government budget deficit, which was released to be a record $US 220 billion in February 2012, is much higher than the current account deficit.

Let's take a closer look at its sub-parts: federal, local and state deficits (see data here).

The state budget has been positive for many years. State revenues were higher than state spending, except during the 2008 financial crisis (see chart 1, click to enlarge images).

Local budget deficits or municipal debt has been much higher historically, and is increasing year by year (see chart 2). Today, the local budget deficits have increased to almost $US 700 billion/year. Cities are having trouble with basic necessities due to looming defaults in municipal bonds as the gap between revenue and spending widens. Federal budget deficits are even worse (see chart 3). The federal budget deficit is close to $US 1.4 trillion/year right now and is increasing. In contrast, a few years earlier, there was virtually no deficit (around $US 200 billion/year). Ever since the 2008 financial crisis, spending by the U.S. government has been surging while tax revenues haven't kept up their pace.

If we look at the total picture (see chart 4) we had a $US 3 trillion deficit during the crisis year of 2008. Since then, we had recovered, but are still posting a total budget deficit of $US 2 trillion/year. If you think this is bad, there is worse. Today, interest rates on government bonds started moving higher. The 10 year bond yield shot up 7%, posting its biggest increase for the year. If interest rates start moving upwards, we can count on higher debt burdens in the future, which in turn results in higher taxes. It is therefore not advisable to be long U.S. bonds like 20 year U.S. Treasuries (NASDAQ:TLT).

State budget:

Chart 1: State Spending - Revenues

Local budget:

Chart 2: Local Spending - Revenues

Federal budget:

Chart 3: Federal Spending - Revenues

Total government budget (Local, State, Federal):

Chart 4: Total Government Spending - Revenues

To see how the federal budget deficit has actually exploded, Zerohedge posted this chart:

Click to enlarge

Federal Deficit

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.