By Michael Lombardi, MBA for Profit Confidential
In its monthly statement of receipts and outlays for the month, the Treasury Department reported that the U.S. government incurred a budget deficit of $107 billion for the month of March 2013. (Source: Department of the Treasury, April 10, 2013.) This monthly budget deficit was a result of the government spending $293 billion while only taking in $186 billion in March.
Since October 1, 2012, the beginning of the government’s fiscal year, the government has spent $600 billion more than it has taken in. Hence, for the first five months of its current fiscal year, the budget deficit is already $600 billion.
We know the U.S. government has run a budget deficit of more than $1.0 trillion for each of the last four years. If the current pace of spending more than what is coming in continues in the current year, then 2013 will be another one-trillion-dollar budget deficit year.
A quote from President Herbert Hoover comes to mind when I see five years of trillion-dollar deficits. He said “Blessed are the young for they shall inherit the national debt.” (Source: Brainy Quote, last accessed April 11, 2013.)
As the U.S. government adds to its budget deficit, it has to borrow more to cover the expenses. This way, our national debt continues to increase daily. We are on pace to surpass $17.0 trillion in national debt this year. A $20.0-trillion national debt is not far away.
For fiscal 2014, President Obama has proposed a budget of $3.778 trillion. In this budget, there are increases in taxes and lower spending on government programs like social security. (Source: Wall Street Journal, April 10, 2013.)
But even with tax hikes and less money going towards social security, the budget deficit for the U.S. government will continue for years to come.
My issue? There will become a point where the interest cost of our national debt will become a major expense for the government. Year to date, the U.S. government has paid interest of over $191 billion on our debt and, for the fiscal year, it expects to pay more than $420 billion for the entire year.
Now, imagine what happens to interest payments when the national debt goes to $20.0 trillion and when interest rates rise from their ridiculously low levels of today.
It’s becoming more obvious each passing day: the U.S. can only stay liquid by printing more money until the day comes that austerity measures become the tool for the government to pay its bills.
Michael’s Personal Notes:
Fitch Ratings, a credit rating agency, has downgraded Chinese yuan-denominated government debt from AA- to A+. (Source: Dow Jones Newswires, April 9, 2013.)
For foreign investors, it may not mean much, because yuan-based government debt is mainly traded domestically. But what this credit rating downgrade shows are troubled spots in the Chinese economy.
The agency stated: “Risks over China’s financial stability have grown.” (Source: Ibid.) Remember; when there is rapid credit expansion, bubbles usually follow.
According to Fitch, the amount of credit issued to the private sector in the Chinese economy was worth 135.7% of the country’s gross domestic product at the end of 2012. Since major banks in the Chinese economy are state-owned, the government bears the risks if things turn sour.
Unfortunately, Fitch is not the only one concerned about the Chinese economy’s future. Big-cap companies are also worried. The CFO of BHP Billiton Limited (NYSE/BHP), Graham Kerr, said regarding the Chinese economy: “Their moderate growth is around the 7 percent to 8 percent mark for the next couple of years… I don’t expect the double-digit growth rates to continue.” (Source: Creighton, A., “Sharp China slowdown is a big risk but we’re diversifying, says BHP CFO,” The Australian April 10, 2013.) Sure, seven to eight percent growth is great, but it’s the lowest pace at which the Chinese economy has grown in years.
With the slowdown in the Chinese economy going from an annual growth rate of 10%–11% to 7%–8%, the repercussions will be felt here at home.
We already have U.S.-based companies facing profit pressures from the eurozone due to an everlasting economic slowdown in the region. If the Chinese economy starts to slow, then American companies that operate there will see their profits squeezed as well.
If the U.S. economy was in a better state than it is today, maybe there would be a fighting chance we could weather the storm created by the slowdowns in the Chinese economy and the outright recessions/depressions in the eurozone. But as U.S. corporations deliver negative earnings growth for the first quarter of 2013, a global economic slowdown will be felt by U.S. companies and eventually the stock market.
What He Said:
“Despite all my ‘yelling’ and ‘screaming’ about gold, I believe only a few of my readers and a small fraction of the general public have taken a position in gold. Why? Because gold’s not trendy…buying condominiums for investment is! If you are an investor, you need to seriously look at investing in gold stocks, because gold bullion prices will likely continue to rise.” Michael Lombardi in Profit Confidential, September, 21, 2005. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.