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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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From: sciAticA errAticA	3/6/2005 8:58:35 PM
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The 5 O'Clock Budget Shadow by Charles Mackay, Sunday March 06 2005 wallstreetexaminer.com The CBO (Congressional Budget Office) released its estimate of the February budget deficit around 5 PM last Friday (March 4). In the deepening late winter Washington DC shadows, it was a fitting time to release news of a record monthly federal budget deficit. The CBO estimates that the February budget deficit will be $115 billion. The previous monthly record was $96.7 billion - a level reached in both February 2003 and 2004. The CBO figure is an estimate of what it expects the Treasury to report. The actual official Treasury Department budget statement will be released on Thursday, March 10. What caused the large deficit? After some initial early month indications that income tax refunds were running ahead of last year, in the end refunds exceeded last year's monthly total by only $4 billion. Also individual income tax receipts were very strong - growing almost 10% in the fiscal year to date. Other tax receipts were also strong. Shifting to the spending side - did higher interest rates contribute to the higher deficit? Surprisingly, not yet. Although total public debt (subject to the debt limit) went up about 8.5% from $7.049 trillion $7.653 trillion, total interest expense only went up about 7%. The Treasury benefited from the maturity or redemption of longer term bonds and mostly replaced them with shorter term notes at lower rates. The real culprit here is spending - with Medicare and Defense expenses growing fast, but spending on just about everything else was also rising at a good clip. The new Medicare prescription drug benefit goes into effect next year, so there isn't much chance that Medicare spending will slow down. The CBO recently reminded us that military spending and interest costs will be increasing in the rest of the fiscal year. Still they optimistically expect (in Friday's preliminary view of a formal projection to be released March 15) that the fiscal 2005 budget will be less than fiscal 2004's record yearly total of $412.5 billion. The CBO assumes that only $32 billion of a pending $82 supplemental budget will be spent by September, which seems like wishful thinking. Expect the lengthening budget shadows to make Treasury security trading a little darker.

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