In a federal budget filled with mind-boggling statistics, two numbers stand out as particularly stunning, for the way they may change American politics and American power.

The first is the projected deficit in the coming year, nearly 11 percent of the country’s entire economic output. That is not unprecedented: During the Civil War, World War I and World War II, the United States ran soaring deficits, but usually with the expectation that they would come back down once peace was restored and war spending abated.

But the second number, buried deeper in the budget’s projections, is the one that really commands attention: By President Obama’s own optimistic projections, American deficits will not return to what are widely considered sustainable levels over the next 10 years. In fact, in 2019 and 2020 ”” years after Mr. Obama has left the political scene, even if he serves two terms ”” they start rising again sharply, to more than 5 percent of gross domestic product. His budget draws a picture of a nation that like many American homeowners simply cannot get above water.

For Mr. Obama and his successors, the effect of those projections is clear: Unless miraculous growth, or miraculous political compromises, creates some unforeseen change over the next decade, there is virtually no room for new domestic initiatives for Mr. Obama or his successors. Beyond that lies the possibility that the United States could begin to suffer the same disease that has afflicted Japan over the past decade. As debt grew more rapidly than income, that country’s influence around the world eroded.

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The Obama administration projects rosier economic-growth prospects than most mainstream economists do but a sobering jobless recovery, according to documents released Monday about underlying assumptions in the government’s $3.83 trillion federal budget for 2011.

Other documents outlining proposed tax cuts and hikes reveal that the administration, concerned about growing income inequality, seeks to pay for a number of programs to help the middle class by taxing the wealthiest Americans and imposing new taxes on corporations, especially those with international operations.

The administration created a public relations nightmare for itself last year when it came into power forecasting an optimistic 8 percent unemployment rate. Policymakers then watched in horror as the jobless rate climbed to 10.2 percent before dipping back to 10 percent in December.

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President Obama was forced to concede today that the US deficit will soar to record levels this year as he unveiled a $3.8 trillion annual budget that faces a perilous passage on Capitol Hill and could decide the fate of his presidency.

Blaming the extraordinary levels of government debt on the profligacy of his predecessor George W. Bush, Mr Obama said that the deficit would reach nearly $1.6 trillion this year, far more than the White House predicted last year and a staggering level that is alienating voters.

Mr Obama, facing a difficult political landscape and an economy where one in ten Americans is still unemployed, sought to present a budget with dual priorities: bringing down the deficit while spending billions of additional dollars to create jobs.

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I do not know about you but I don’t have the ability to comprehend the magnitude of these figures. In any event, read all the links.

President Barack Obama will propose on Monday a $3.8 trillion budget for fiscal 2011 that projects the deficit will shoot up to a record $1.6 trillion this year, but would push the red ink down to about $700 billion, or 4% of the gross domestic product, by 2013, according to congressional aides.

The deficit for the current fiscal year, which ends on Sept. 30, would eclipse last year’s $1.4 trillion deficit, in part due to new spending on a proposed jobs package. The president also wants $25 billion for cash-strapped state governments, mainly to offset their funding of the Medicaid health program for the poor.

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“Our immersion in the details of crises that have arisen over the past eight centuries and in data on them has led us to conclude that the most commonly repeated and most expensive investment advice ever given in the boom just before a financial crisis stems from the perception that ‘this time is different.’ That advice, that the old rules of valuation no longer apply, is usually followed up with vigor. Financial professionals and, all too often, government leaders explain that we are doing things better than before, we are smarter, and we have learned from past mistakes. Each time, society convinces itself that the current boom, unlike the many booms that preceded catastrophic collapses in the past, is built on sound fundamentals, structural reforms, technological innovation, and good policy.”

– This Time is Different (Carmen M. Reinhart and Kenneth Rogoff)

When does a potential crisis become an actual crisis, and how and why does it happen? Why did most everyone believe there were no problems in the US (or Japanese or European or British) economies in 2006? Yet now we are mired in a very difficult situation. “The subprime problem will be contained,” said now controversially confirmed Fed Chairman Bernanke, just months before the implosion and significant Fed intervention. I have just returned from Europe, and the discussion often turned to the potential of a crisis in the Eurozone if Greece defaults….
Greece is running a budget deficit of 12.5%. Under the Maastricht Treaty, they are supposed to keep it at 3%. Their GDP was $374 billion in 2008 (about €240 billion). If they can cut their budget deficit to 10% this year, that means they will need to go into the bond market for another €25 billion or so. But they already have a problem with rising debt. Look at the following graph on the debt of various countries….

When Russia defaulted on its debt and sent the world into crisis in 1998, they had total debt of only €51 billion. Greece now has €254 billion and added another €8 billion this week, and needs to add another €24 billion (or so) later this year. That’s a debt-to-GDP ratio of over 100%, well above the limit of the treaty, which is 60%.

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On the very day this week when the Congressional Budget Office warned that the succession of previously unimaginable trillion-dollar-plus budget deficits could inflict ruin on the United States, the Senate faced a moment of truth.

For the first time, a truly bipartisan proposal aimed at averting such a calamity came to a vote. By 53 to 46, the senators approved the measure officially described as a bill for “responsible fiscal action, to assure the long-term fiscal stability and economic security of the federal government of the United States, and to expand future prosperity and growth for all Americans.”

Of course, this being the 21st-century Senate, it meant defeat because of a failure to command the 60-vote supermajority the opposition now always requires.

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DJ reports Senate Democrats are to seek an increase to the federal government’s borrowing limit by $1.9 trillion lifting the total amount the U.S. government can owe to $14.294 trillion, several congressional aides said. The increase is forecast to support the federal government’s borrowing needs the end of 2010, one Senate Democratic aide said. The borrowing hike comes soon after a $290 billion increase to the debt ceiling agreed to by lawmakers at the end of 2009.

David Walker, chief executive officer at Peter G Peterson Foundation and former U.S. Comptroller, talks with Bloomberg’s Carol Massar and Matt Miller about the U.S. financial crisis.

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Happy New Year, readers, but before we get on with the debates of 2010, there’s still some ugly 2009 business to report: To wit, the Treasury’s Christmas Eve taxpayer massacre lifting the $400 billion cap on potential losses for Fannie Mae and Freddie Mac as well as the limits on what the failed companies can borrow.

The Treasury is hoping no one notices, and no wonder. Taxpayers are continuing to buy senior preferred stock in the two firms to cover their growing losses””a combined $111 billion so far. When Treasury first bailed them out in September 2008, Congress put a $200 billion limit ($100 billion each) on federal assistance. Last year, the Treasury raised the potential commitment to $400 billion. Now the limit on taxpayer exposure is, well, who knows?

The firms have made clear that they may only be able to pay the preferred dividends they owe taxpayers by borrowing still more money . . . from taxpayers. Said Fannie Mae in its most recent quarterly report: “We expect that, for the foreseeable future, the earnings of the company, if any, will not be sufficient to pay the dividends on the senior preferred stock. As a result, future dividend payments will be effectively funded from equity drawn from the Treasury.”

The loss cap is being lifted because the government has directed both companies to pursue money-losing strategies by modifying mortgages to prevent foreclosures.

Read it all and there is more from John Huffman here.

In reality, this little quarter-percent tax would devastate America’s financial markets and the broader economy. First of all, the “in and out” cost of a transaction is not a quarter-percent: it is a half-percent. Again, this might not seem like much, but consider how difficult is to make even 4% on a safe investment. When one factors in an average inflation rate of 3%, the resulting profit is only 1%, and this is before the effect of state and local taxes.

The sponsors of HR4191 are either so naïve as to have no conception of the operations of modern-day financial markets — and of the competitiveness which makes a single basis point a crucial cost advantage — or, more likely, so callous as not to care. They see an opportunity to curry favor with a poorly informed electorate by trashing Wall Street while at the same time placing within their grasp trillions of dollars of future tax revenues to secure future political advantage.

Unfortunately, those that might be harmed include the patient, long-term investors who invest their funds in IRAs, 401Ks, and other retail investments. These investments are generally low-yielding mutual funds for which trading costs make a crucial difference in long-term return. Barron’s has calculated that the annual cost of a total market index, now 0.07%, would rise to 0.15% under the proposed tax. The loss of 0.08% per year, or a compounded 0.116% per decade, might not seem like much, but when it is imposed every year and compounded over the fifty-year investing lifetime of an average investor, it amounts to a great deal.

And this is the effect even in the case of the lowest-cost index funds.

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Americans will feel the pain before the gain from the health care overhaul Democrats are close to pushing through Congress.

Proposed taxes and fees on upper-income earners, insurers, even tanning parlors, take effect quickly. So would Medicare cuts.

Benefits, such as subsidies for lower middle-income households, consumer protections for all and eliminating the prescription coverage gap for seniors, come gradually.

“There’s going to be an expectations gap, no question about that,” said Drew Altman, president of the nonpartisan Kaiser Family Foundation. “People are going to see their premiums and out-of-pocket costs go up before the tangible benefits kick in.”

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The healthcare reform bill that will go to the vote on the US Senate floor this week falls well short of Barack Obama’s original vision.

As the president took office at the beginning of this year, he laid out a plan for reform including a robust “public option” for a nationwide government-backed scheme that would inject a bolt of competition into the inefficient medical insurance market.

Instead, he is set next month to sign into law a bill that, while dramatically expanding healthcare insurance coverage, will largely leave insurance in the hands of private companies.

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Obama’s overhaul would also change how private firms insure workers. Perhaps 18 million workers could lose coverage and 16 million gain it, as companies adapt to new regulations and subsidies, estimates The Lewin Group, a consulting firm. Private insurers argue that premiums in the individual and small group markets, where many workers would end up, might rise an extra 25% to 50% over a decade.

The administration and the CBO disagree. The dispute underlines the bills’ immense uncertainties. As for cost control, even generous estimates have health spending growing faster than the economy. Changing that is the first imperative of sensible policy.

So Obama’s plan amounts to this: partial coverage of the uninsured; modest improvements (possibly) in their health; sizable budgetary costs worsening a bleak outlook; significant, unpredictable changes in insurance markets; weak spending control. This is a bad bargain. Benefits are overstated, costs understated.

This legislation is a monstrosity; the country would be worse for its passage. What it’s become is an exercise in political symbolism: Obama’s self-indulgent crusade to seize the liberal holy grail of “universal coverage.” What it’s not is leadership.

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The U.S. Senate’s health-care overhaul plan would almost double a proposed increase in Medicare payroll taxes for high-earners and impose a new tax on indoor tanning, replacing an earlier levy on plastic surgery.

The new version of the bill announced today by Senate Majority Leader Harry Reid contains a 0.9 percentage-point increase in the Medicare tax for individuals who earn more than $200,000 and couples earning more than $250,000, according to an estimate by the nonpartisan Joint Committee on Taxation. The increase would start in 2013.

That would generate $86.8 billion over six years, up from about $50 billion that would have been generated by an earlier proposed increase of 0.5 percentage point. Those affected would pay a Medicare tax rate of 2.35 percent, while their employers would continue to pay 1.45 percent.

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Major procedural reforms will be needed as well. One essential step is the implementation of “pay-as-you-go” rules, which require that all increases in spending or tax cuts be financed by savings elsewhere in the budget. The statutory creation of a “fiscal future commission”””modeled on the Defense Base Closure and Realignment Commission, a federal body whose recommendations are subject to an up-or-down vote in Congress””could represent a major breakthrough. It might even be time to reconsider passing a balanced-budget amendment to the US Constitution, a provision that exists in nearly all US states and is now being pursued in a somewhat analogous form by the European Union. Whatever the specific policy approach, the underlying objective should be to create a system that will achieve a balanced budget over the course of the economic cycle.

A responsible fiscal policy would permit the Federal Reserve to run a relatively easy monetary policy, which would hold down interest rates and prevent overvaluation of the dollar. If the Obama administration is looking for a historical model, it should aim to replicate the Clinton-Greenspan policy of the late 1990s (a mix of budget surpluses and low interest rates) rather than the Reagan-Volcker policy of the early 1980s (a mix of large deficits and high interest rates).

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The latest calculation of the National Debt as posted by the Treasury Department has – at least numerically – exceeded the statutory Debt Limit approved by Congress last February as part of the Recovery Act stimulus bill.

The ceiling was set at $12.104 trillion dollars. The latest posting by Treasury shows the National Debt at nearly $12.135 trillion.

A senior Treasury official told CBS News that the department has some “extraordinary accounting tools” it can use to give the government breathing room in the range of $150-billion when the Debt exceeds the Debt Ceiling.

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Thirty-six members of Congress came out against a proposed tax on stock and derivatives trading, warning that it would drive up unemployment and undercut a shaky economic recovery in the U.S.

Charging investors for trading stocks, futures, options and other instruments would also drive up the cost of credit and private investment for both businesses and governments, according to a Dec. 15 letter sent by the 36 members, a copy of which was seen by Dow Jones Newswires.

The letter marks the latest opposition to an early December proposal by Rep. Peter DeFazio, (D., Ore.), who introduced the transaction-tax idea as one way to raise money for job creation and paying down the federal budget deficit.

“In reality, it would be a tax on all investment and savings vehicles because mutual funds and money market fund transactions are, by definition, purchases and sales of securities and bonds,” wrote the members of Congress in the letter.

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When Congressional Democrats last week pushed to lift the U.S. federal debt ceiling by nearly two trillion dollars, Republicans blasted the move as fiscally irresponsible and voiced concern over the long term consequences of a level of deficit spending not seen since World War II.

So on Monday House Majority Leader Steny Hoyer indicated that lawmakers would seek to pass a temporary borrowing limit to last through 2010.

Still, fiscal conservatives fret over what they view as runaway spending and Congress’ silence over how to deal with the growing deficit….

“We haven’t got any clear indication that there’s a strategy to control this,” said Desmond Lachman, resident fellow at the American Enterprise Institute. “We hear the Obama administration paying lip service but there is no clear indication of how to prevent the U.S. from getting into increasing debt.”

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Call it the fractal geometry of fiscal crisis. If you fly across the Atlantic on a clear day, you can look down and see the same phenomenon but on four entirely different scales. At one extreme there is tiny Iceland. Then there is little Ireland, followed by medium-size Britain. They’re all a good deal smaller than the mighty United States. But in each case the economic crisis has taken the same form: a massive banking crisis, followed by an equally massive fiscal crisis as the government stepped in to bail out the private financial system.

Size matters, of course. For the smaller countries, the financial losses arising from this crisis are a great deal larger in relation to their gross domestic product than they are for the United States. Yet the stakes are higher in the American case. In the great scheme of things””let’s be frank””it does not matter much if Iceland teeters on the brink of fiscal collapse, or Ireland, for that matter. The locals suffer, but the world goes on much as usual.

But if the United States succumbs to a fiscal crisis, as an increasing number of economic experts fear it may, then the entire balance of global economic power could shift. Military experts talk as if the president’s decision about whether to send an additional 40,000 troops to Afghanistan is a make-or-break moment. In reality, his indecision about the deficit could matter much more for the country’s long-term national security. Call the United States what you like””superpower, hegemon, or empire””but its ability to manage its finances is closely tied to its ability to remain the predominant global military power. Here’s why….

A very important piece–make sure you read it all.

There is a brewing crisis, which, if it develops as seems inevitable, has the potential of reducing all of the drama of the early Obama administration to child’s play beginning next year. Only this time, it will be the government’s crisis, not the nation’s.

The New York Times recently noted that the government has gone on what the Concord Coalition’s Robert Bixby calls a “teaser rate” borrowing binge, at an interest rate approaching … zero. Rates will rise, substantially, and soon. (The Treasury Department already is attempting to lock in rates on longer-term borrowing– already driving its short-term costs up.)

How bad could this be? So glad you asked.

The federal government currently pays, according the article, $202 billion a year in interest. White House estimates that interest payments will rise to $700 billion a year in 2019.

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Democrats plan to allow the government’s debt to swell by nearly $2 trillion as part of a bill next week to pay for wars in Afghanistan and Iraq. The amount pretty much equals the total of a year-end spending spree by lawmakers and is big enough to ensure that Congress doesn’t have to vote again on going further into debt until after the 2010 elections.

The move has anxious moderate Democrats maneuvering to win new deficit-cutting tools as the price for their votes, igniting battles between the House and the Senate and with powerful interest groups on both the right and the left.

The record increase in the so-called debt limit – the legal cap on the amount of money the government can borrow – is likely to be in the neighborhood of $1.8 trillion to $1.9 trillion, House Majority Leader Steny Hoyer, D-Md., said Friday.

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The U.S. government racked up a gaping shortfall in the first two months of this fiscal year after posting a record budget deficit last year, congressional analysts said on Friday.

In October and November, the government spent $292 billion more than it took in, the nonpartisan Congressional Budget Office said.

That was even worse than the same period last year, when the government was on its way to posting a record $1.4 trillion deficit for the fiscal year that ended Sept. 30.

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Treasury Secretary Timothy Geithner said any tax on financial transactions would have to be designed to ensure taxpayers don’t ultimately bear the burden, criteria he said no current plan meets.

“I have not seen the version of that that I think works,” Geithner said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend. “Otherwise people would have done this a long time ago.”

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We have now reached the stage of the health-care debate when all that matters is getting a bill passed, so all news is good news, more subsidies mean lower deficits, and more expensive insurance is really cheaper insurance. The nonpolitical mind reels.

Consider how Washington received the Congressional Budget Office’s study Monday of how Harry Reid’s Senate bill will affect insurance costs, which by any rational measure ought to have been a disaster for the bill. CBO found that premiums in the individual market will rise by 10% to 13% more than if Congress did nothing. Family policies under the status quo are projected to cost $13,100 on average, but under ObamaCare will jump to $15,200.

Fabulous news!

“No Big Cost Rise in U.S. Premiums Is Seen in Study,” said the New York Times, while the Washington Post declared, “Senate Health Bill Gets a Boost.” The White House crowed that the CBO report was “more good news about what reform will mean for families struggling to keep up with skyrocketing premiums under the broken status quo.”

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For the investor (the person who risks the capital to create real live self-sustaining jobs), every investment, whether it results in a profit or not, would be taxed two more times.

What is near certainty is that this bill will succeed at driving traders to international markets that are escaping the stilted centralized economy that DeFazio and Perlmutter feel the need to champion.

It’s a given that this misguided vengeance against Wall Street is comfort food for populist legislators, but “Wall Street” isn’t stocked exclusively with revolting would-be criminals. It is made up of retirees, small-business owners, entrepreneurs and parents who invest in their kids’ college funds. At last count, nearly 50 percent of Americans are, on some level, invested in the stock market.

If one was a hopeless skeptic, he might believe these legislators were trying to undermine private sector growth by re-appropriating wealth in such a ham-handed way. Even reliable liberal Sen.Chuck Schumer said that a Wall Street transaction tax had the potential to “harm economic recovery efforts by deterring capital investment.”

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A sudden crisis is unlikely. Other rich countries with far bigger debts relative to the size of their economies, from Italy to Japan, have soldiered on without hitting a wall. Stable politics, transparent laws and economic dominance give America unequalled credibility with lenders. For all the anxiety the declining dollar drew from China this week (see article), it has no serious rival as the world’s reserve currency. America has sensibly used this fiscal freedom to enact an aggressive stimulus programme. This should be maintained for as long as it is needed.

Yet ignoring the future is also costly. The problem is not the deficits in the next couple of years, but in the years that follow. Uncertainty over how taxes may be raised to shrink deficits may already be weighing on business confidence. Worries about inflation or default could start to push up interest rates. Eventually, private investment will be crowded out.

Barack Obama and Congress can pre-empt such corrosive uncertainty with a plan to reduce the deficit now. Far from requiring immediate spending cuts or tax increases, a credible plan would reassure markets and allow an orderly exit from fiscal stimulus. The Federal Reserve provides a model: it does not plan to tighten monetary policy in the near future, but has signalled its willingness to do so when inflation threatens.

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“What a good country or a good squirrel should be doing is stashing away nuts for the winter. The United States is not only not saving nuts, it’s eating the ones left over from the last winter.”

–William H. Gross, managing director of the Pimco Group, the bond-management firm, in the article posted just below this entry

The United States government is financing its more than trillion-dollar-a-year borrowing with i.o.u.’s on terms that seem too good to be true.

But that happy situation, aided by ultralow interest rates, may not last much longer.

Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.

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The White House is lukewarm about proposals by congressional Democrats to introduce broad legislation to create jobs, instead favoring targeted measures that would be less likely to inflate the deficit, administration officials said.

There is as yet no agreement within the White House or in Congress on how to try to curb the U.S. jobless rate. But the differences in opinion suggest that rifts could emerge among Democrats as they wrestle with how to beat back the highest unemployment rate in a generation.

The jobless rate, which hit 10.2% in October, has continued to climb despite the implementation of a $787 billion stimulus package in February.

The subheader for the article is: White House Is Unenthusiastic on Legislation That Would Raise Government Debt. To which I respond–good for them. Read it all.