Let’s start today’s edition with some good news. The US budget deficit is shrinking dramatically. The CBO lopped $200bn off this year’s deficit to bring it down to just over $600bn or 4% of GDP. If the bull market survives the year, that number will fall even further. A 2% budget deficit is within reach for fiscal year 2013.
While the CBO wishes to extrapolate the good news into the next decade, forecasting fiscal deficits that far into the future is a fool’s errand. You may ignore the chart above from 2014 going forward.
The CBO does attempt to accurately forecast the deficit numbers. This policy is evidenced by the fact that some years it misses high and some years it misses low. Eurozone countries have predicted far rosier numbers since the beginning of the Eurocrisis and have rarely missed high.
While basket cases France, Spain and Italy surprised no one by contracting in the first quarter, Germany’s avoided entering recession by the slimmest of margins. A meager 0.1% of economic growth from the abysmal performance recorded at the end of last year. Despite optimism from the eurocrats, there is no end in sight to this recession.
The Eurozone’s largest markets, China and the U.S, are not growing enough to stoke exports in addition to the lack of demand on the continent. The ECB’s monetary policy will not keep the vigilantes at bay forever, so these countries better arise from their economic torpor soon.
The American manufacturing renaissance was just a lot of hype. Industrial production has decreased in two of the last three months. Easy money has raised asset prices but has done little to increase domestic demand for goods and especially labor. The mainstream media continues to report on an American recovery that really isn’t there.
The central banks have painted themselves into a corner. Easy money policies have saved the world from a deeper recession, but at the price of inflating asset prices around the globe. If they taper down asset purchases, the stock market will drop like a stone. On the other hand, maintaining the rate of money printing keeps the bubbles inflating to their inexorable fate. This is quite the pickle. If I was running the Fed, I don’t know what I would do either.