The CBO on Friday announced it projected the 2010 fiscal year deficit (which ended September 30) to be $1.29 trillion, about $125 billion less than last year's record $1.4 trillion deficit. That puts the deficit at nearly 9 percent of GDP, and puts us on a track for a nearly $8.5 trillion federal shortfall over the next ten years. What does this mean?
Unfortunately, the long-term negative outlook on deficit spending from the CBO last week is nothing new. And neither are the ramifications. Each year as deficits continue to mount-no matter whether the number is $1.4 trillion or $500 billion-the United States losses financial stability. It is hard to predict exactly what might cause a downgrade to U.S. bond ratings, but such an event could easily trigger another global financial panic and send the planet into a deep recession. The effects of another credit crunch would have far reaching effects throughout America, even down to Main Street, with the imported day-to-day goods Americans have come to take for granted may dry up along with a tightened international trade market.
And every year the deficit builds, the more impossible it looks for future governing generations to fix the debt problem. Adding $8.5 trillion to the national debt would nearly double debt held by the public over the next 10 years to $17.5 trillion-well above what gross domestic product will likely be by 2020 given the slow growth rate of the economy. Unless, of course, the Federal Reserve decides to pursue a higher inflation target as a means of trying to get out of the crisis and pay down the deficit. Yet, that course of action would have its own set of unintended consequences that are likely to be significantly worse that the problems we face today, including long-term international suspicion in the fiscal stability of the United States.