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U.S. Deficit, Debt Grows As Financial Crisis Heats Up

The financial crisis is burning one big fat hole in Uncle Sam’s wallet. From Bloomberg’s Matthew Benjamin today:

The global financial crisis is turning into a bigger drain on the U.S. federal budget than experts estimated two weeks ago, ballooning the deficit toward $2 trillion.

Bailouts of American International Group, Fannie Mae and Freddie Mac likely will be more expensive than expected. States are turning to Washington for fiscal help. The Federal Reserve said this week it will begin buying commercial paper, the short- term loans companies used to conduct day-to-day business, further increasing costs. And analysts now say the $700 billion bank- rescue plan passed by Congress last week may have to be significantly larger…

The 2009 budget deficit could be close to $2 trillion, or 12.5 percent of gross domestic product, more than twice the record of 6 percent set in 1983, according to David Greenlaw, Morgan Stanley’s chief economist. Two weeks ago, budget analysts said the measures might push deficit to as much as $1.5 trillion.

The Bloomberg reporter also brought up the issue of our national debt. Benjamin wrote:

Gross U.S. debt, which includes debt held by the public and by government agencies, this year reached about $9.6 trillion, or about 68 percent of gross domestic product. The rescue legislation increased the government’s debt limit to more than $11.3 trillion from $10.6 trillion.

Well, at least you can’t fault Congress for not planning ahead. Further exacerbating the problem with our nation’s finances, the Associated Press is reporting tonight:

Treasury Secretary Henry Paulson said Friday that the Bush administration will move ahead with a plan to buy stock in financial institutions.

Mr. Paulson said the program to purchase stock in financial institutions will be open to a broad array of institutions.

Ahead of the curve, Benjamin noted even before tonight’s announcement:

Meanwhile, Treasury Secretary Henry Paulson indicated two days ago that he is considering buying stakes in a wide range of banks in coming weeks to help recapitalize them.

Such a move is allowed under the $700 billion bailout package Congress passed last week. Edmund Phelps, winner of the 2006 Nobel Prize for economics and a professor at Columbia University, said such action is necessary — and will likely turn out to increase the measure’s cost…

The additional borrowing could push the national debt well past 70 percent of GDP, the highest since the immediate aftermath of World War II, when the U.S. was still paying off war debt.

In an attempt to illustrate just how out of control the debt is becoming, the Wall Street Journal’s Phil Izzo wrote in the “Real Time Economics Blog” yesterday:

The national debt clock, the unofficial tracker of the federal deficit maintained by the Durst Organization in New York, has reached its limits. Last month, as the national debt exceeded $10 trillion for the first time, the clock ran out of digits to record the number.

The dollar sign in the clock had to be deleted and replaced with a one to record the massive number. The clock’s owners say a new model — with space for two extra digits — will be in place early next year.

Now the debt clock will be able to reach the quadrillions. Hopefully, that’s not a level that will be breached any time soon.

Wow. I didn’t even know there was such a word as “quadrillions.”

I’ve given you a decision to make
Things to lose, things to take
Just as she’s about ready to cut it up
She says
Wait a minute honey I’m gonna add it up

-Violent Femmes, “Add It Up” (1982)

Sources:

“Cost of U.S. Crisis Action Grows, Along With Debt (Update1)”
Matthew Benjamin
Bloomberg, October 10, 2008

”U.S. Plans Bank Stakes”
Associated Press, October 10, 2008

“Sign of the Times: National Debt Clock Runs Out of Digits”
Phil Izzo
Wall Street Journal (Real Time Economics Blog), October 9, 2008