Obama and the $3.8 Trillion Budget

What a marvelous recovery! But there are so many unresolved mysteries! GDP growth over 5%...but, mysteriously, no jobs...and no rally in the housing market.

And now, to compound the mystery, Mr. Obama has come forward with a $3.8 trillion budget.

The markets like it. Stocks rose 118 points on the Dow yesterday. Gold went up $21. Investors see more hot money on its way...a Vesuvius of it...

The amount of the budget itself is staggering. That's a lot of money. But even more staggering is the glaring omission: the Obama administration is planning to spend $1.6 trillion it doesn't have. And that's on top of the $1.35 trillion it didn't have, but nevertheless spent, last year. Where is all this money coming from? Another mystery...

Let's see...put those two deficits together and you've got a budget hole as big as the Milky Way... Nearly $3 trillion, or more than 20% of GDP.

Another thing that is mysterious about this galaxy of debt is that it comes just as the economy is supposed to be recovering. If you thought the economy were recovering, why would you risk such a huge, record- shattering deficit?

Nothing quite adds up. The GDP is expanding at a healthy pace - according to the numbers handed out by the feds. But people have few jobs and little income.

"Wage and benefit growth hits historic low," reports The Wall Street Journal.

Employers aren't employing. Workers aren't working. And houses are no longer throwing off cash. That leaves more and more people with empty pockets.

Apparently, not even the feds themselves believe the economy is really out of the ditch. We are already rolling along on the recovery road - supposedly. Still, the feds send out the most expensive tow truck in history!

And now The Financial Times draws the obvious conclusion:

"US Deflation No Longer Seen as a Risk."

You wanna bet?

The world's number one economy is running huge deficits. But the world's number two economy is running even bigger ones. Not much bigger...but slightly bigger.

In Japan, deficits are a bit larger than tax receipts. In America, they are a bit smaller. In both cases they are enormous...and growing.

For all its colossal deficits, Japan has not bought its way out of depression...or out of deflation either. Au contraire, the more it spends fighting deflation the further prices fall.

How could this be? Another mystery. How could government be so inept as to shoot itself in the foot whenever it pulls a trigger? How could it be so near-sighted as to aim for one thing and hit the thing it was meant to protect? How could it be so lame-brained as to do exactly the wrong thing at exactly the wrong time?

We can't answer those questions...at least, not this minute.

So, let's turn to the evidence. There it is in yesterday's news report from Bloomberg:

"Consumer prices in Japan in record fall."

And there you have another mystery, don't you? Japan inflates the money supply with its zero rates over more than a decade...and its Godzilla budget deficits. And what happens? Its economy sinks and its consumer prices go down!

And so here comes the US of A following the Japanese lead...in the sincerest form of flattery...

Will it not get the same results?

We don't know. But we wouldn't be surprised.

We have a lot more to say about this...

..about how the economic theories behind these moves are corrupt, linear and superficial (if not downright stupid)...

..and about how the real driving force behind these deficits is politics, not economics. Economists are just useful idiots. The politicians are using them to grab more money and power for themselves and their friends...

..but let's go directly to the denouement of this mystery story. Here's what is really going on:

First, the GDP growth story is one part statistical noise, one part counterfeit, and one part damned lie. We're in a depression. It will take years to resolve itself.

That's why unemployment remains high...and why there will be no recovery in housing prices. They may go up. They may go down. They won't ever get back to the bubble highs of 2006 - not in real terms. Not in our lifetimes.

Second, the mystery of the $1.8 trillion deficit - it too is a mixture of mendacity, audacity, and intellectual laxity. In short, the feds are spending so much money for one reason only: because they think they can get away with it.

Can they?

Of course not...not really. Here's what is going to happen...

The reality of the non-recovery is going to catch up with this market. Stocks were down in January. Most likely, they'll sink for the rest of the year too.

The economy will slide as the de-leveraging process continues. It won't be straight down. But by fits and starts, the mistakes will be corrected...

..but that brings us back to this $3.8 trillion government budget. Its purpose, in large part, is to prevent the corrections from occurring. The feds will try to turn the US into Zombieland, just like the Japanese feds did. You'll see massive federal spending taking up some of the slack from the private sector - but essentially wasting money on useless projects. And you'll see major zombie corporations - GM...AIG...etc - propped up with taxpayer's money.

Speaking of AIG, special agent Neil Barofsky is on the case. He's 'probing' 25 cases of possible fraud involving TARP funds. The AIG bailout is one of them. The original price tag for saving Goldman's speculative positions with AIG was $85 billion. The whole tab later came to $182 billion.

The flatfoot Barofsky wants to know where the money went. To tell you the truth, we're curious too - although we doubt there will be any surprises.

But back on our beat...how the mysteries get resolved...

..we know why the economy is winding down...and we know why the feds are running such huge deficits...

..but big deficits aren't pushing up prices in Tokyo; they're having the opposite effect. They're pushing them down. Does that mean US deficits will get the same results - the economy and prices lower instead of higher?

We don't know...but our guess is that 'yes' is the right answer. More on this later in the week.

Bill Bonner
for The Daily Reckoning Australia

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