The Higher the Deficit Soars, the Harder the Economy Could Crash
-- October 14, 2003

The US budget deficit for the fiscal year that began October 1 will rocket to a record $600 billion, according to a group of 22 bond trading firms. The widening deficit is fueled by soaring costs of our involvement in Iraq, a proposed federal prescription drug benefit, $1.7 trillion in tax cuts, and more.

And, just like past estimates, this $600 billion estimate is probably far too optimistic. Just take a look at some previous predictions. In May, the White House projected a $304 billion shortfall for 2003. Then the White House revised its estimate of the shortfall to $455 billion. The real number will likely come in higher. This deficit is growing so quickly that no one can get a handle on it.

The ever-rising deficit has terrible implications for the economy. By using runaway spending as an economic rescue effort, the government could torpedo the very recovery it hopes to achieve.

As the government pays more to finance the deficit, it competes with corporate borrowers for cash -- sending interest rates higher. This raises the cost of capital -- and that means lower investment, lower output and lower productivity. And that will smack down any economic recovery -- hard.

related article:
U.S. 2004 Deficit Will Surge to $600 Bln, Firms Say

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