A Scam to Make Soaring Budget Deficits Look Smaller

By Victor Sperandeo with the Curmudgeon

Backgrounder on U.S. Budget Deficits:

Deficits did matter in the 1980s under President Reagan, as increasing U.S. budget deficits created a fear that the private sector would be “crowded out” by massive government borrowing.  Bond vigilantes would go on a buyers strike to force the federal government to lower budget deficits and resulting borrowing.

Modern Monetary Theory (MMT) came along in the early 1990s to suggest the government can create more money without any consequences as it’s the issuer of the currency (in this case, the U.S. dollar – the world’s reserve currency).  That was followed by the Federal Reserve’s QE programs (starting in November 2008) to buy most of the newly issued U.S. government debt.  Hence, budget deficits were no longer a concern for financial markets or the U.S. economy.

U.S. Budget Deficits Skyrockets while GDP is Positive:

In the first six months of fiscal year 2023, the United States borrowed $1.1 trillion, with a $376 billion deficit in February, according to the latest Monthly Budget Review from the Congressional Budget Office (CBO).  Maya MacGuineas, president of the Committee for a Responsible Federal Budget said, “Only halfway through the fiscal year and we’ve already borrowed $1.1 trillion – a massive $6 billion per day. Yet lawmakers have done little to write a budget and figure out a plan for how to slow this endless flow of borrowing.”

This reality of the six-month deficit being $1.1 trillion, assumes another $1.1 trillion deficit from April to September. This is occurring as the U.S. economy, measured by real GDP, is still growing. 

It’s critically important to note that as the U.S. economy goes into recession (as Fed economists now forecast), budget deficits will greatly increase as tax revenues decline and transfer payments increase.

Curmudgeon Note:

A recent IRS ruling will widen the budget deficit from January 1st to October 15, 2023.  Disaster-area taxpayers in most of California and parts of Alabama and Georgia now have until Oct. 16, 2023, to file various federal individual and business tax returns and make tax payments.

The Oct. 16 deadline also applies to the estimated tax payment for the fourth quarter of 2022, originally due on Jan. 17, 2023. This means that taxpayers can skip making this payment and instead include it with the 2022 return they file on or before Oct. 16, 2023 estimated tax payments, normally due on April 18, June 15 and Sept. 15, as well as quarterly payroll and excise tax returns normally due on Jan. 31, April 30 and July 31 are now due on Oct. 16.

ΰWithout tax revenue from disaster area taxpayers until Oct. 16, the budget deficit from January 1 to Oct. 15 will increase more than previously forecast.

Is the National Debt Sustainable?

U.S. national debt is growing at 7.65% annually from 2000 to date! The debt is growing more than 4.32 times real GDP using the CPI (which is 20 bps higher than the GDP deflator)1.

Note 1.  From 2000 to now (last 23 years), the real GDP growth annual average rate was 1.97% using the GDP deflater, while Nominal GDP was 4.31%. But using the CPI, real GDP grew at a lower rate of 1.77%.

This is obviously unsustainable. However, a government with a printing press (aka “Fed keystroke entries”) may be able to extend the national debt beyond the rationally obvious?

A New Misleading Concept – “Primary Deficit”

To evaluate the government’s fiscal situation, analysts typically reference the total budget deficit — the gap between total federal spending (which includes interest on the national debt) and revenues. Now the CBO has come up with a new concept to make it appear that the budget deficit is smaller than it actually is.

The CBO released a major report in February titled, “The Budget and Economic Outlook 2023-2033.” It states that their “baseline budget projections are meant to provide a benchmark that policymakers can use to assess the potential effects of changes in policy; they are not intended to provide a forecast of future budgetary outcomes.”

The cumulative deficit for the 2024–2033 period is projected to total $20.2 trillion, or 6.1% of GDP. Since 1973, the annual deficit has averaged 3.6% of GDP. In CBO’s projections, deficits equal or exceed 5.5% of GDP in every year from 2024 to 2033. Since at least 1930, deficits have not remained that large for more than five years in a row.

CBO’s projection of the deficit for the full year of 2023 was $1,410 trillion (Page 6 Table 1.1). However, the CBO added a new line item called “PRIMARY DEFICIT,” which is defined as: the deficit without counting the interest the government pays on its debt.

Primary deficits— deficits excluding net outlays for interest—increased from 2.9% of GDP in 2023 to 3.4% in 2024 and 2025 in CBO’s projections.

This is a new and misleading concept to convince the media and novice analysts that the U.S. budget deficit is not rising due to higher interest rates. Yet higher interest rates the government pays on its debt will greatly increase the real budget deficit. Who’s kidding whom?

This graph from the Peterson Foundation tells the true story:


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Market Comments:

Critical for the Fed’s future agenda is Gold not moving up above $2000, and the U.S. Dollar index (DXY) staying above 100. These price levels must be watched closely.  Any move above or below the stated levels will mean a significant event is occurring.                               

Gold does best when GDP is decreasing, along with the CPI and corporate earnings, as that portends the next steps for the Fed will be easing!  

Therefore, I still believe long Bonds, Gold, and Silver, while short stocks are the best portfolio for a recession, which I believe will begin this quarter.

The markets currently assume a +25 bps increase in Fed Funds to be announced after the FOMC May 3rd meeting. That +25-bps rate hike is now fully discounted with a 98.4% probability according to CME Fed Funds forecast tool.

ΰThat rate hike will reinforce the recession and add more firepower to this portfolio.


Sidebar:  Earnings Estimates coming down but still too high!

The NY Times notes that the outlook for corporate profits has swiftly deteriorated. Wall Street’s forecasters expect that S&P 500 profits in the first three months of 2023 fell almost 7% from a year earlier, according to estimates collected by FactSet. That would be the second consecutive quarterly decline, and the biggest since a severe — though brief — slump in the early days of the coronavirus pandemic in 2020.

Continuing worries about inflation followed by bank failures in March have soured the outlook for corporate profits, which are a major driver of stock prices.  Businesses have also told investors to dial down their expectations, with 78 companies in the S&P 500 offering guidance about their results that are below the average Wall Street estimates.

2023 EPS estimate for the S&P 500 remains $200, which is 9% below consensus estimates, according to B of A Global Research. Despite a big downward revision in consensus estimates (-13%) since last June, B of A’s Savita Subramanian thinks they still look too optimistic with the U.S. headed for a recession.

B of A analysts are watching tech spending, which they expect to decrease. They estimate about 20% of IT spending is from the Financial Services sector, which is now looking to shore up capital in the wake of the March turmoil in the banking sector.

B of A: 2023 consensus EPS is falling off the cliff, -13% since June 2022 S&P 500 historical FY2 EPS revisions vs. 2023 consensus EPS (2023 as of 4/9/23)

Chart, line chart

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Source: BofA US Equity & Quant Strategy, FactSet

Note: historical average based on 2001-2022



Do you trust the U.S. government? 

As the great comedian George Carlin said, “The quality of our thoughts and ideas can only be as good as the quality of our language.”

The so called “Primary Deficit” is not an accurate measurement of U.S. fiscal health.  It is totally misleading!  This manipulation   is to fool the public at large.


When the recession kicks in, the deficit will be $3 trillion for fiscal 2023 on September 30th fiscal year end.

End Quote:

The words of the Billy Joel song “Honesty” should be read by the CBO leaders and government officials:

“If you search for tenderness, it isn't hard to find. You can have the love you need to live. But if you look for truthfulness You might just as well be blind. It always seems to be so hard to give. Honesty is such a lonely word. Everyone is so untrue. Honesty is hardly ever heard. And mostly what I need from you. I can always find someone to say they sympathize. If I wear my heart out on my sleeve. But I don't want some pretty face to tell me pretty lies. All I want is someone to believe. Honesty is such a lonely word. Everyone is so untrue. Honesty is hardly ever heard. And mostly what I need from you.”

The Complete Works: 121 Billy Joel Songs, Ranked

Billy Joel is an American singer, pianist, voice actor and songwriter.


Be well, stay healthy, wishing you peace of mind. Please email the Curmudgeon (ajwdct@gmail.com) if you have any comments, questions, or concerns. Till next time…...


The Curmudgeon

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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