The US federal deficit has topped US$1 trillion for the first time ever and could grow to nearly US$2 trillion by this fall, intensifying fears about higher interest rates, inflation and the strength of the dollar.
The deficit has been widened by the huge sum the government has spent to ease the recession, combined with a sharp decline in tax revenues. The cost of wars in Iraq and Afghanistan also is a major factor.
The soaring deficit is making Chinese and other foreign buyers of US debt nervous, which could make them reluctant lenders down the road. It could also force the Treasury Department to pay higher interest rates to make US debt attractive longer-term.
“These are mind-boggling numbers,” said Sung Won Sohn, an economist at the Smith School of Business at California State University. “Our foreign investors from China and elsewhere are starting to have concerns about not only the value of the dollar but how safe their investments will be in the long run.”
The Treasury Department said on Monday that the deficit last month totaled US$94.3 billion, pushing the total since the budget year started in October to US$1.09 trillion. The administration forecasts that the deficit for the entire year will hit US$1.84 trillion in October.
The US debt now stands at US$11.5 trillion.
Interest payments on the debt cost US$452 billion last year — the largest federal spending category after Medicare-Medicaid, Social Security and defense.
The overall debt is now slightly more than 80 percent of the annual output of the entire US economy, as measured by GDP. During World War II, it briefly rose to 120 percent of GDP.
History shows the dangers of assuming too soon that economic downturns have ended.
Former US president Franklin D. Roosevelt made that mistake in 1936.
Believing the Depression largely over, he sought to reduce public spending and to balance the federal budget, but that undermined a fragile recovery, pushing the economy back down in 1937.
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