President-elect Barack Obama said on Tuesday at a meeting of his economic team that the US can expect  “trillion-dollar deficits for years to come,” as he spoke for a second day on a planned stimulus plan that is expected to total $800 billion in new spending and tax cuts over the next two years.

Obama stressed the necessity of running record-setting deficits for several years and also the imperative of having a plan to bring them down markedly in subsequent years.

“We’re not going to be able to expect the American people to support this critical effort unless we take extraordinary steps to ensure that the investments are made wisely and managed well,” Obama said.

The President-elect was seeking to reassure lawmakers and the financial markets that he was concerned about the long-term dangers of running huge deficits and would take steps to limit and eventually reduce them.

Obama is expected today to name a chief performance officer with the task of finding government efficiencies. The non-partisan Congressional Budget Office will also release its latest budget estimates, providing the first official predictions of the shortfalls tied to the economic slowdown and the fallen financial markets.

Morgan Stanley economists said on Tuesday that the Fed’s powerful shift towards quantitative easing that started in mid-September, which has sent excess bank reserves to astronomical levels near an US$800 billion daily average, around 500 times higher than normal, has notched one significant early victory in successfully moving the financial system smoothly through year-end.  The economists said that it it was a light week for economic data, but what was released was terrible.  The manufacturing ISM plunged to one of its worst-ever readings, as the combination of the badly deteriorating domestic economy, the impact of severely weakening global growth on exports and a worsening inventory overhang have sent the factory sector into a major downturn.  Consumers are also in a miserable mood as the labor market continues to deteriorate, with the Conference Board’s consumer confidence gauge hitting a record low.  Views of the labor market continued to worsen, which we expect to be reflected in another miserable employment report in the upcoming week. 

US Budget Deficit

The US budget deficit was $455 billion for the budget year that ended Sept. 30, 2008 - - nearly triple the $161.5 billion recorded in 2007. It was also about 3.2% of US GDP (Gross Domestic Product). The national debt was $10.5 trillion, almost double the debt that Bush inherited in 2001 and ten times the level when President Reagan took office in 1981 - - which was then about 20% of annual GDP. In 2008, total spending rose 9.1% to $2.98 trillion from a year earlier, the biggest rise in annual outlays since a 9.6% gain in 1990. Revenue fell 1.2% to $2.52 trillion, the first decline since 2003. US military spending in 2008 jumped 12.5% from the previous year to $594.7 billion After peaking at $290 billion in 1992, deficits declined each year, dropping to a level of $22 billion in 1997. In 1998, the US recorded its first budget surplus ($69.3 billion) since 1969. As a percent of GDP, the budget bottom line went from a deficit of 4.7% in 1992 to a surplus of 0.8% in 1998, increasing to a 2.4% surplus in 2000. In the United States, the federal government deficit on a unified budget basis averaged 3 1/2% of GDP during the 1980s and the early 1990s. As a result, the outstanding federal debt rose from 20% of GDP in 1981 to 49% of GDP in 1992. The budget deficit was 6% of GDP in 1983 and a $1 trillion deficit in 2009 would amount to in the range 6 to 7% of GDP depending on the severity of the recession. The national debt ratio will be above 70% of GDP. Ireland's  budget deficit may exceed 10% of GDP in 2009. A rise in the national debt and budget deficit can push up long-term interest rates and related mortgage rates for example. However, the big public aid in 2008 in response to the financial crisis is reflected in a temporary increase in the annual deficit. At a time when dousing the fire is the priority, concerns about the national debt are not a front-burner priority. However, what is clear from past experience, once a deficit rises above the historical average, it is very hard to reduce the trend. Historical Tables