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Conclusion: Earlier today, the Congressional Budget Office took their deficit estimates up dramatically for the next three years.  They are now estimating a combined budget deficit for 2011, 2012 and 2013 of $3.28 trillion.  This is up from their prior estimate released in August 2010 of $2.3 trillion. 

 

Positions: Short U.S. Treasuries via the etf SHY

“The future is not about a gift, it is about an achievement.”

-Robert Kennedy

The aforementioned quote was used by President Obama in his State of the Union address last night.  There is no doubt President Obama’s oratory skills are second to none and, at times, that’s what a nation needs – a President who speaks well and gives the electorate a good feeling about the future.  Unfortunately, we are a now in a period where the nation, from a fiscal perspective actually needs what President Obama campaigned on . . . change.   In fact, for the future to be an “achievement”, we need a dramatic change in the path of the deficit.

On the other hand, change in the political sphere in the United States is certainly on the way. An interesting takeaway from last night was that there were two responses to President Obama.  One from up and coming Republican Congressman Paul Ryan (Wisconsin)  and another response from Congresswoman Michele Bachmann (Minnesota), representing the Tea Party.   Congresswoman Bachmann’s address was short, to the point, and fact based.   While some of it was certainly political in nature, I think she framed up the economic debate over the next couple years very effectively with the following statement:

“After the $700 billion bailout, the trillion-dollar stimulus, and the massive budget bill with over 9,000 earmarks, many of you implored Washington to please stop spending money that we don't have. But instead of cutting, we saw an unprecedented explosion of government spending and debt. It was unlike anything we have seen in the history of the country.”

In the coming weeks and months, this drum beat will get louder and louder.  As a result, spending will be a focus on this current Congress.

Earlier today the Congressional Budget Office took up their deficit projections dramatically for the next three years.  In the table below, I’ve compared their estimates versus their prior estimates and our Hedgeye estimates (which are pending an upward (larger deficit) revision).

Our Deficit Gift Just Increased - 1

 

It is amazing the difference six months can make.  Primarily due to changing their view of future revenue(i.e. taxes), the CBO has increased their aggregate estimate for the budget deficit in the next three years by +46%. 

While on some levels we do applaud President Obama’s call for $400BN in deficit cuts over the next ten years, the number is way too small to matter or “change” our current path to escalating debt on the federal balance sheet.  In fact, this aggregate reduction of $400BN over ten years isn’t even half of the increase the CBO just made for the next three years in their deficit projections.

Further, from 2012 to 2021, the CBO projects an aggregate deficit in the United States of $6.9TN, so while $400BN in spending cuts over the same time period is something, it is not change.  In fact, President Obama’s proposal only cuts 5.8% of the CBO’s projected budget deficit over the next ten years.  That is, the proposal is really “pocket change”, as it relates to the deficit issue.

To see any meaningful appreciation in the dollar, we will have to see a plan implemented that takes a serious shot at reducing the deficit.  Unfortunately, $400BN over ten years is not that plan.  That’s not a political statement, that is just fact.

Daryl G. Jones
Managing Director