President Obama is smooth. He has an incomparable ability to say the correct thing, then go and do the exact opposite. For instance, he says we in America cannot continue the boom-bust cycle of economic activity, and that we must repent for our past sins of building GDP growth by blowing up asset bubbles. He also contends that George W. Bush was disingenuously hiding the true size of the deficit by keeping certain items off-budget. In those two statements he is completely correct.
However, he uses the magician's tactic of deflection to sell his own brand of economic gimmickry. First, Obama directs your attention towards his promise of removing Bush's budget tricks, but then whips out his smoke and mirrors of trillion dollar deficits and accounting games.
Taking a closer look at how the President arrives at his rosy projection of cutting the deficit to "just" $530 billion by the end of 2013, you find he accomplishes it not by keeping expenditures off-budget, like his processor, but by utilizing grossly unrealistic economic growth assumptions.
Mr. Obama assumes the contraction in GDP for 2009 will be only 1.2%. That's a big improvement from the -6.34% annual rate drop of last quarter and far better than the non-partisan Congressional Budget Office's (CBO) prediction of -2.2% growth for 2009. From there, things get truly surreal. The Obama administration predicts GDP growth for 2010 will rebound to 3.2% and then increase by more than 4% for each of the next three years!
How realistic you ask is a 4%+ growth rate in GDP for the years 2011-2013? Well, let's look at the past 11 years for some guidance.
Starting from the beginning of 1998 thru Q4 of 2008, the average quarterly GDP growth rate was only 2.17%. And the average yearly growth rate was just 2.7%. What's truly amazing about the sub-par growth rate of the last 11 years (which was well below trend growth of 3%) is that it encompassed two of the biggest manias in the history of the United States-the internet equity bubble of the late 90's and real estate bubble in the middle of this decade.
You see, once you know the trick it's easy: if you want to make deficits appear smaller, just pretend growth will be higher than what should be responsibly expected. Then simply bury your growth expectations in the fine print.
Perhaps part of Obama's magic act of producing well above-trend GDP growth rely on conjuring up another asset bubble that rivals the previous two. But the sad truth is that whether you use Obama's overly-optimistic projections or those of the CBO, deficits as a percentage of GDP will eclipse 100% of total output by 2019 (a record outside the years just after the end of WWll). But during the immediate post-war era, we controlled the entire world's manufacturing base and were not facing the wave of entitlement spending which looms, which means the consequences of all this debt will be dire.
When the veil of illusion is dropped, the truth behind will be revealed. Record debt, lackluster growth and robust inflation will be the byproducts of runaway spending and increased government intrusion into the free market.
Barack Obama wants you to believe he is a fiscal conservative and that he is providing honesty and transparency in the government. The administration's trick is to make opacity appear as transparency and mendacity to appear as truth.
This masterful performance will best be viewed through gold-colored glasses.
Michael Pento is the Chief Economist for Delta Global Advisors and a contributor to greenfaucet.com