Obama Spending Plan Underestimates Deficits, Budget Office Says

By Brian Faler

March 6 (Bloomberg) -- President Barack Obama’s budget proposal would create bigger deficits than advertised every year of the next decade, with the shortfalls totaling $1.2 trillion more than the administration projected, according to the Congressional Budget Office.

The nonpartisan agency said yesterday the deficit will remain above 4 percent of the nation’s gross domestic product for the foreseeable future while the publicly held debt will zoom to $20.3 trillion, amounting to 90 percent of GDP by 2020. By then, interest payments on the debt will have quadrupled to more than $900 billion annually, the report said.

Deficits between 2011 and 2020 would total $9.76 trillion, the CBO said.

Economists generally consider deficits topping 3 percent of GDP to be unsustainable because that means government debt is growing faster than the ability to pay back the money.

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Independent View

The CBO report is designed to give Congress an independent assessment of the administration’s budget request. The difference between the two outlooks is largely attributable to varying economic assumptions that affect projections of how quickly tax revenues will pour into the Treasury.

Revenues will be about $2 trillion less than the administration projects, while spending will be lower by about $600 billion, according to the CBO report.

The administration projected last month the deficit would shrink to as low as 3.6 percent of GDP, with the 10-year shortfall totaling $8.5 trillion. It foresees the debt growing to 77 percent of GDP in 2020.

The deficit for the 2010 fiscal year has been projected to be $1.6 trillion, a record. Obama last month established an 18- member bipartisan panel to suggest to Congress steps that would reduce the shortfalls.
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The Guidotti-Greenspan rule states that reserves should equal short-term external debt (one-year or less maturity), implying a ratio of reserves-to-short term debt of 1. The rationale is that countries should have enough reserves to resist a massive withdrawal of short term foreign capital.

The principle behind the rule is simple. If you can't pay off all of your foreign debts in the next 12 months, you're a terrible credit risk. Speculators are going to target your bonds and your currency, making it impossible to refinance your debts. A default is assured.

So how does America rank on the Greenspan-Guidotti scale? It's a guaranteed default. The U.S. holds gold, oil, and foreign currency in reserve. The U.S. has 8,133.5 metric tonnes of gold (it is the world's largest holder). That's 16,267,000 pounds. At current dollar values, it's worth around $300 billion. The U.S. strategic petroleum reserve shows a current total position of 725 million barrels. At current dollar prices, that's roughly $58 billion worth of oil. And according to the IMF, the U.S. has $136 billion in foreign currency reserves. So altogether... that's around $500 billion of reserves. Our short-term foreign debts are far bigger.