"Reagan proved deficits don't matter." US VP Dick Cheney
So far, the Vice President's statement is true. Using the Vice President's logic, we can expect many deficits in the economy to continue indefinitely, such as:

1. Trade Deficit
We are importing foreign goods in excess of exports at a rate of $1 billion/day and hoping that the funds are used to buy US debt.
2. Federal Deficit
US is spending in excess of current receipts by $1 billion per day
3. Social Security & Medicare Deficit
US has guaranteed benefit payments to retiring baby boom generation when demographics dictate that benefits will exceed payroll taxes in 2018 while current "surplus" taxes cover current retirees benefit checks.
4. Housing Affordability Deficit
House prices will continue to outpace household incomes and interest rates will stay at current 45 year low levels providing cash for more consumer spending.
5. Savings Deficit
Baby boom generation will be able to maintain their current standard of living without saving for retirement.
6. Consumer-Credit Deficit
Consumers will continue to increase spending beyond the growth in their incomes with additional easy money from government tax rebates and credit card debt.
7. Energy-Oil Deficit
Fossil fuel reserves that are controlled by Islamic nations will continue to meet growing consumption of India / China and US at under $40 per barrel.
8. War Deficit
President Bush's policy of "making the world a safer place", will not increase anti-US activities by extremist Islamic factions.
9. Credibility Deficit - External
10. Humility deficit

1. Trade Deficit


As a result of huge annual trade imbalances, foreigners now own $2.5 trillion of America. And it'll get worse. America is currently consuming more than it produces. In exchange for goods and services (mostly from China), we are exporting US dollars. Under normal circumstances, this would depress the value of our currency outside the US which we have seen over the past 2 years. In addition, to keep the US dollar from falling too far, and loosing a trading advantage with the US, our trading partners continue to repatriate those dollars back to the US in the form of US treasury bonds and agency securities (Fannie Mae and Freddie Mac). This keeps long term rates at modest levels, enabling the US consumer to borrow more money to spend on products made outside the United States. In effect, we are mortgaging our property to continue to import cheap foreign made goods. This does little to benefit our domestic job market. The trade deficit is currently growing at $543 billion per year or a cumulative total of $4.3 Trillion through 12/31/2003.

2. Federal Deficit


Maybe deficits don't matter. But out-of-control spending does. The budget is growing at an annual rate of nine percent. Yet neither Congress nor the President has any desire to control spending. Instead, Today's $500 billion annual deficits have reversed a one-time projected surplus of $5.6 trillion and will drive America $7.8 trillion in debt by 2011. The three largest items in the budget are not expected to decline anytime soon
  • Health & Human Services,
  • Defense, and
  • Interest on the national debt

    A Brookings Institution study warns that if we do nothing for the next 10 years, problems will get so bad that "balancing the budget would require a 41 percent cut in spending on Social Security and Medicare, a 47 percent cut in discretionary spending, or a 17 percent cut in all non-interest spending." The study also predicts that politically nothing will be done until the crisis explodes.

    3. Social Security and Medicare Deficit


     Social Security will be bankrupt by 2016. Or 2046. Or maybe never, depending on which politicians are jiggling the numbers. Critics blame the tax cuts, warning of $7 trillion shortfalls. But Wharton Economist Jeremy Siegel says a one-percent change in productivity estimates and the problem disappears. Still, the administration promised to privatize Social Security, giving Wall Street access to trillions of new fee-generating assets. Unfortunately, privatization will not take care of the system's underlying structural problems and America's declining savings rate.

    The Medicare reform bill passed with inadequate prescription drug freebies for voting seniors. The drug cartel got huge benefits including an absurd no-price negotiation clause. Within weeks the White House had to admit the price tag was underestimated; it is $500 billion not $400 billion. Boston University economist Larry Kotlikoff estimates long-term net Medicare debt at $36.6 trillion, and climbing. Politicians will want to give seniors even more, negating any chance of serious reform.

    4. Housing Affordability Deficit


     The domestic US housing market has benefited from the reduction in long term interest rates which are now at 45 year lows. Recently, property values have increased in some areas at a rate of 9 percent annually. However, personal incomes and net worth levels have been lagging behind as the chart below indicates. As consumers see the value of their real estate rise, they are more encouraged to leverage that increase in the form of cash-out equity loans for consumer purchases. This explains how the US home owners have been able to continue to spend beyond their incomes. Few in the media see the parallels to Japan's real estate bubble in the early 90's and the Equity Market speculative bubble in the US stock market in the late 20's. Both saw asset values increase funded by large increases in debt. Both bubbles were followed by asset deflation when debts became worthless.

    Household Balance Sheet Item

    Growth In 2003

    Growth Since 4Q 1999

    Household Real Estate

    10.3%

    45.9%

    Household Financial Assets

    12.9

    (1.9)

    Household Liabilities

    10.7

    41.9

    Household Net Worth

    11.5%

    10.2%

    Wages And Salaries

    2.6%

    11.7%

    Payroll Employment

    (0.1)

    (0.4)
    http://www.contraryinvestor.com/moapril04.htm

    http://www.contraryinvestor.com/moapril04.htm

    5. Savings Deficit


     We have become a financially obese consumer nation, with little set aside for the future. Since 1980 the savings rate of American citizens has dropped from eight percent to about one percent. Only one in three Americans is saving enough to retire comfortably. The net worth of the average American, exclusive of home equity, is only $15,000. Without Social Security the average person over 65 would be living below the poverty level.

    6. Consumer-Credit Deficit


     Easy credit encourages ever increasing consumption. Today consumer debt is about $2 trillion and increasing. That doesn't include home mortgages. Meanwhile, more than one million Americans declare personal bankruptcy annually. We are a nation living beyond its means, mortgaging the future excessively.

    7. Energy-Oil Deficit


    Economist Paul Erdman recently wrote: "One of the great geopolitical cliches of our time is that he who controls the supply, and thus also the price, of crude petroleum, is Master of the Universe," but that's no longer true. So far the Iraqi war has produced the opposite result intended. We've driven allies away and hardened alliances among Islamic nations, many of which control the supply and price of oil. More and more we see deficits in our access to oil. The rising price of domestic gasoline is just one consequence.

    8. War Deficit


    We are now engaged in World War III, euphemistically calling it a war on terror. It will continue indefinitely. Unfortunately, the federal budget omits long-term estimates of maintaining 100,000 military in Iraq, another deficit exceeding $1 trillion over the next decade. The "security" forces in Iraq will not change subsequent to the official turn-over of provisional authority to the Iraqi counsel on June 30, 2004. This could be viewed by the Arab world similar to the Vichy government installed by the German occupation forces (WWII France). At the point in time that our forces are extracted from Iraq, the Shiite majority would probably install a government structure similar to that currently in force in Iran.

    9. Credibility Deficit - External


    America's international credibility is near zero due to our failure to find the weapons of mass destruction in Iraq. Even our allies don't trust us. And a billion Muslims worldwide now see America as the neo-Christian crusaders attacking their culture. Conservative talk-show hosts down play pictures of US soldiers "hazing" Iraqi detainees, these pictures reinforce the erroneous stereotypes of American infidels that mock the foundation of Muslim principles currently taught at all levels of State schools and religious schools called " Madrassas" . This reduced international credibility has had little effect on the popularity of the current administration. However, these external forces are the very same that the US relies upon to subsidize it's consumption deficit in consumer goods and oil .

    10. Humility deficit


     Humility? We've lost it. Political historian Kevin Phillips warned us: "Most great nations, at the peak of their economic power, become arrogant and wage great world wars at great cost, wasting vast resources, taking on huge debt, and ultimately burning themselves out." And the cost of our arrogance may compound America's multiple deficits for generations to come.

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