The Office of Management and Budget (OMB) estimates that the US 2009 budget deficit will rise to 1.84 Trillion. The 2009 budget deficit was estimated 1.75 Trillion deficit in February. The 2009 budget deficit will rise to 12.9% of GDP up from 12.3% in the February estimate. The OMB estimates the 2010 budget deficit at 1.25 Trillion, up from the 1.17 Trillion estimate in February.
The budget deficit is about four times the record budget deficit set last year. The US government will borrow 46 cents for every dollar spent. The increased budget deficit reflects the impact of deepening recession; weak tax receipts, higher costs of unemployment insurance, the bank and auto bailouts and the cost of the stimulus plan. The OMB revised budget includes 2009 GDP forecast of -1.2% and 3.2% in 2010. The OMB GDP forecast is more optimistic than bipartisan Congressional Budget Office (CBO) or Blue Chip survey. The CBO expects 2009 GDP at -3% and 2010 at 2.9% The Blue Chip survey forecasts 2009 GDP at -3% and at 1.8% in 2010. If GDP growth is below the OMB estimate it will mean even larger US deficits.
The Obama administration expects the stimulus plan coupled with the Fed‘s plan to boost liquidity and buy long term bonds will underpin the US recovery. A number of risks to the US economy remain factors which may threaten the Obama administrations growth estimates. These risks include the possibility that more US bankruptcies may emerge, the fact that that US banks are far from healthy despite the encouraging bank stress tests results and jobs creation will likely be slow to recover. Structural impediments to US economy include consumer debt, weak bank lending,lack of jobs creation and diminished wealth effect from weak housing and equity markets. The Obama administration expects the stimulus plan to create or save 3.5 Million jobs but does not expect new jobs creation until 2010. The US April unemployment rate rose to its highest level since 1983 at 8.9%. So far the US government is the only sector of the US economy hiring.
The USD traded at four-month low Tuesday, apparently, pressured by optimism that the global economy is nearing a bottom and that the worst of the financial crisis has passed. The economic crisis and the Obama plan to increase budget spending to combat the crisis have China worried about the value of its US assets. China holds an estimated 800 Billion in US debt. The growing US budget deficit increases the risk of inflation and a possible sharp fall in the USD. The USD could be pressured if the US elects to pay back its debt with cheaper dollars or global investors stop buying US debt. In response to the worsening US budget outlook and potential risk to China’s US holdings, China has called for a discussion of replacing the USD with a reserve currency tied to the IMF’s SDR. Recently’ Chinese officials have suggested that the call for a discussion on replacing USD as the world’s reserve currency was based on academic considerations. The Fed plan to buy long term treasuries has helped to reduce China fears about value of US bonds but the latest US budget news may ignite fresh rhetoric from China about USD reserve status. China is also diversifying some of its estimated 2 Trillion in reserves buying hard assets, like gold and commodities. Fed Chairman Bernanke tried to defend the dollar and said he expects the USD will remain the world's global reserve currency and the USD will likely stay strong because of the US economy's strength. It makes us wonder if Tuesday’s USD decline to a four-month low is less inspired by optimism about the global economy and more a reflection ofthe risks of the ballooning US budget deficit.