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07 January 2009

$1.2 Trillion Dollar Budget Deficit

Hold on to your hats! Remember last year when everyone was aghast at the prospect of a $500 billion deficit? Well now all the temporary tax incentives, spending measures are expiring and low and behold, the deficit Obama is inheriting is $1.2 trillion.

And no, that doesn't include Obama's economic stimulus package that he must do because of the collapsing economy he's also inheriting. That could add anywhere from $800 billion to $1.3 trillion more.

These are record dollar amounts. But our wise government has found a way to make it seem not so bad. Yes, these are the same people who remove food and energy from the inflation index calculation. Doesn't make sense to include things everyone uses and needs, after all.

As a percentage of GDP, the 2009 deficit is less than the deficit in 1983 when it was 6% of GDP. The current deficit could grow to 14%, but don't worry because it is still less than the 21.5% deficit in 1945.

The Congressional Budget Office says the cause of the deficits was the collapse of the housing market and the financial market turmoil. The Federal government has thus far committed $7.2 trillion to combat the crisis, primarily in the form of investments and loans.

The CBO expects GDP to fall in 2009 and slowly recover in 2010. But the unemployment rate at the beginning of 2010 is expected to be around 9%.

The markets go through recessions to correct the imbalances that occur during normal economic activity. In this case, the imbalance was astronomical having been inflated even further with low interest rates and easy money for so long.

Given that's the case, what kind of correction will we have to go through to correct the imbalance of artificially injecting trillions of dollars into the system? Trillions of dollars that no one has, money that is literally being printed as fast as the presses will allow.

It is ironic that the people that are interfering with the free market system are the same ones that say the market should be allowed to correct itself.

Inflation is being built into the system, hopefully it won't turn into hyperinflation, but it will be big.

Bernanke, a student of the Great Depression, doesn't want to make the same mistakes that were made in the 1930's. Back then, they did virtually nothing. Now, the Fed is doing a lot. So that mistake is not being repeated, but that doesn't mean the outcome will be any better. Last time we had a great depression, this time we could have hyperinflation.

It is worthy to note that before 1929, all recessions were called depressions. The depression of the 30's was so big that it was labeled the Great Depression. After the Great Depression the government felt that it carried a bad stigma to call economic corrections depressions, so they changed the title to recession.

In other news, Democratic leaders are ready to accept Roland Burris into the Senate. The only obstacle left is the Illinois Supreme Court's decision to determine if the Secretary of State is required to sign off on Burris' credentials.

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