In the last 100 years, encountering a year during which the U.S. federal government has achieved a balanced budget has been as rare as the likelihood that Vladimir and Estragon will actually meet Godot.
As with most Western economies, as well as with that of Japan, fiscal deficits by sovereign governments have become so normative that a term has long been in vogue to describe this phenomenon: the co-called "structural deficit." But all that was prior to the onset of the global financial and economic crisis that erupted in 2008 with the collapse of Lehman Brothers. We are now in new territory, never before encountered by sovereign governments on such a prolific scale. Welcome to the era of the structural mega-deficit.
In compiling data for my new book, Global Economic Forecast 2010-2015: Recession Into Depression, I recognized that the size of current and projected fiscal deficits for the United States and other advanced and major economies is so much greater than typical structural deficits, a new terminology was required. The term I have adopted in my report, "structural mega-deficit," implies a whole new and unprecedented reality for public financing. In essence, a deficit which approaches or exceeds 10% of a national economy's GDP, and has an aspect of permanence similar to previously tolerated structural deficits, has entered the fiscally turbulent terrain of structural mega-deficits.
As with private consumers, sovereign economic policymakers have become addicted to debt, nowhere more so than in the United States, Western Europe and Japan. For example, when the Eurozone was established with a single currency, participants were expected to show "prudent" fiscal management of the public finances, by ensuring that their national deficits did not exceed 3% of national GDP. Heaven forbid a balanced budget had even been suggested as an ideal target. Now, however, even the Eurozone's supposedly responsible 3% cap on annual deficit to GDP ratios is coming apart at the seams, witnessed most recently by the fiscal crisis in Greece, where the current budget deficit is expected to reach 12.7% of that nation's GDP.
It is the United States, however, where the emergence of the structural mega-deficit reaps the most tangible dangers for the global economy. In the past, key economic policymakers throughout the world maintained that a structural deficit of around 3% of GDP could be easily sustained as long as the national economy produced a modest level of growth. However, there exists no mathematical models that demonstrate how any nation's economy, including that of the U.S., can sustain structural mega-deficits. With the official U.S. deficit for the 2009 fiscal year having reached 10% of GDP and the 2010 federal budget likely to produce a deficit in the range of $1.5 trillion, America's public finances are clearly in a debt trap that is unsustainable by any logical measure. The Congressional Budget Office projects a cumulative deficit of $9 trillion over the next decade; based on the CBO's track record, the actual deficit is likely to be much worse.
One of the strange paradoxes for the U.S. economy is that in 2009, even with a tripling of the national deficit, the annual payment by the federal government for interest on the national debt was actually lower than the prior year. This was due to the unique and anomalous conjunction of much of America's national debt being financed by short-term Treasuries with historically low interest rates established by the Federal Reserve. However, with growing doubts on the part of foreign lenders as to the long-term credit worthiness of the United States, it is inevitable that the days when much of America's growing debt load could be financed at almost zero interest rates will soon end. With the public debt of the United States based on an average turnover for refinancing of four years, the shortest timeframe of any large indebted economy, a spike in bond yields will add potentially hundreds of billions of dollars to the annual U.S. deficit. A time may not be far off when current taxes and other federal government revenue will cover less than half of the annual expenditures of the federal government. All this will be occurring as outlays for Social Security and Medicare begin to exceed revenues, adding further to the structural mega-deficit, and at a rate that will become increasingly voracious.
The ultimate tragedy about the present and future danger of structural mega-deficits in the United States and other major economies is that this is an impending train wreck that can be viewed from a great distance before its catastrophic impact. Yet, in spite of the clear and obvious unsustainability of structural mega-deficits, with very few exceptions the political leadership in the United States, in both the Democratic and Republican parties, is conspicuously silent.
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