The US Deficit - A Top Political Priority

Though I do not agree with all of the recommendations put forth, this article does highlight the importance of reining in deficit spending:

Feldstein, Martin, 2010. The deficit dilemma and obama's budget. The Wall Street Journal, Nov. 18.

This quote caught my attention:

"Surprisingly, the chairmen overlooked the easiest route to reducing the deficits over the next decade: scaling back the costly budget that President Obama presented earlier this year. Much of the projected doubling of the national debt between 2010 and 2020 reflects the spending and tax proposals in that budget." bold added

Further,

"The Congressional Budget Office estimates that those proposals would, if enacted, raise the 10-year budget deficit by $3.8 trillion, even after taking into account the president's proposed $1.3 trillion of new taxes on businesses and higher-income individuals. The $5.1 trillion gross cost of the Obama proposals reflects the cost of making the Bush tax cuts permanent for individuals with incomes below $250,000, of providing additional tax cuts for low- and moderate-income individuals, and of increasing spending on domestic programs."

The American political system must act in a decisive way to reduce out front budget deficits. Inaction will roil financial markets. The probable outcome; higher interest rates as increased government financing needs cause an oversupply of US Bonds and a decrease in bond prices. If bond buyers believe that deficit spending will cause inflation, then bond prices will drop even more perhaps causing stagflation (inflation in conjunction with low economic growth).

Though I have mixed feelings about Quantitative Easing II, I do not think the program will stoke much if any inflation because America continues to experience the after effect of the economic bubble burst. However, if deficit spending by government is projected over a 10 year period, then there is every reason to believe that bond prices will sink even if inflation is not a major problem with economic growth.

In all scenario's that I can foresee, unemployment will be high for many years into the future. This is an unfortunate situation.