The US Federal Budget Deficit. How much is the
total Debt? What are the short and long-term
effects?  What is the solution?

President Obama recently gave a speech promoting
his positions on the federal deficit and how to deal
with it. The Republican controlled Congress has come
forth with their own very different ideas on how to
combat the problem. Whatever the solution, it would
be hard to overstate the financial problem that the US
government has here. Drastic steps need to be taken
to increase tax revenue (stimulate growth, raise tax
rates) and/or lower federal expenses (cut programs,
cut benefits, create efficiencies). If the US doesn’t
take these steps, it risks devolving into a financial
quagmire that will lower the standard of living for
Americans for years to come. Ultimately, the US will
be forced to deal with the problem, even if it doesn’t
now. It may not be unable to continue borrowing from
the world as it currently does. Even if it can the higher
debt expense will crowd out future growth. Or runaway
inflation may ultimately appear as a result of the US
printing money to cover its debts.   

It’s true that the US has been running big Federal
deficits for many years. Some of the biggest deficits
were run up during the 1980’s, when Ronald Reagan
supposedly wanted to rein in spending. That never
actually happened though, as the federal government
ran up deficits as high as 25% per year over tax
receipts during the mid 1980’s.  All while the stock bull
market raged on.  

There is no question, however that we’ve entered a
categorically different level of deficit spending over
the last few years, starting in 2009. It clearly cannot be

Let’s take a closer look at these numbers. Prior to
2009 the largest annual deficit was $413 billion or
22% of the budget. The average annual deficit for the
past 10 years was $262B or 12.5% of total tax
revenues. We even briefly had an overall surplus in
1999/2000. The federal debt held by the public was
$5.0 trillion as recently as the end of 2007. That’s the
entire amount of debt, cumulative of the entire history
of the US. Fast forward to 2011, where the cumulative
debt is projected to be $10.4T.  So we’ve doubled the
debt in four years. In four years we’ve grown the deficit
as much the entire previous history of the US.

Of course, to be fair, we’ve also just had the worst
financial crisis in US history, measured in nominal US
dollars, than we’ve ever had. But we still need to make
some hard choices about the services that our
government is providing, how much of a federal deficit
is too much, and how much debt is too much, under
any circumstances.   

Let’s take a further look into the deficit numbers:

The latest estimate of the federal deficit for 2011 is
1.5 trillion. This is based on estimated Total Federal
spending for 2011 of $3.7T. Federal tax revenues in
2011 are expected to be only $2.23T. So, we are
spending a whopping 65% more than we are taking in
tax revenue this year. By any measure this is a huge
and unprecedented gap. Anyone at any level of
financial management knows that this kind of budget
gap cannot be sustained for very long without
compromising the long-term solvency of an operation.
The deficit, as measured as a percent of GDP was
9.8%. In the decade prior to 2009, the average deficit-
to-GDP ratio was 2.0%.  

The sharp upturn in the deficit began in 2009, as a
result of the previous year’s financial meltdown and
recession.  The shortfall was $1.4 trillion in 2009 and
$1.3T in 2010. These deficits were 10.0 and 9% of
GDP, respectively. 2009 was the highest pct of GDP
in 65 years.

Click here to go to Part Two of The US Federal Debt
Crisis - Conclusion.

Click here for additional facts concerning the Federal
Budget Deficit / Debt.

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The US Federal Deficit / Debt Crisis.  
How Much is the Debt and What Can
We Do About It? Part One.
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