San José, CA – On Friday, April 10, the U.S. Department of the Treasury reported that the federal government budget deficit for the first six months of Fiscal Year 2009 (which runs from October to September) was $957 billion. This was more than three times as large as the deficit was at the same time last year and is on track to a record $1.8 trillion ($1800 billion) deficit as projected by the Congressional Budget Office. This is the largest federal government budget deficit relative to the size of the economy since 1944 at the height of World War II.

The single biggest factor in the ballooning deficit was the bank bailout. The federal government’s Troubled Asset Relief Program, or TARP, led to almost $300 billion in new spending, while aid to troubled insurer AIG and mortgage lenders Fannie Mae and Freddie Mac came to another $60 billion. These bailouts accounted for more than half of the increase in the budget deficit.

About one-quarter of the increase in the budget deficit was because of a fall in tax revenues. With rising unemployment and business bankruptcies, the federal government collected about $150 billion less in taxes as compared to the same time last year. Another quarter of the budget deficit was due to increases in spending besides the bank bailout. The largest increase, at $25 billion, was for increases in unemployment insurance benefits, followed closely by a $24 billion increase in spending on the Department of Defense.

The huge federal budget deficit has caused the public debt, or the total owed by the U.S. government, to rise by a little more than a trillion dollars over the last six months, to a total of more than $11 trillion. This is more than 80% of Gross Domestic Product (GDP), the total of final goods and services produced in the United States in a year.

The huge Federal budget deficit raises two questions: first, can the U.S. government continue to borrow to bailout financial institutions, pay for the wars in Iraq and Afghanistan, fund the growing demand for unemployment benefits, food stamps, and other benefits, and spend on the economic stimulus package? Secondly, will the large budget deficits be able to stimulate the economy out the current depression?

So far the federal government has had no problem borrowing enough to finance the deficit. This is mainly due to a rush to buy U.S. government bonds instead of other, more risky types of debt, following the financial crisis that exploded last September. Foreign investors, banks and businesses have been the biggest buyers, which has boosted the value of the dollar. Money market mutual funds and financial security dealers and brokers have also shifted to lending to the

federal government.

But with growing public opposition to more bank bailouts, and growing concern in the rest of the world that the U.S. budget is out of control, the government is planning to shift even more of the financial market bailout to the Federal Reserve, the U.S. central bank. The Federal Reserve has committed itself to a huge increase in purchases of U.S. government bonds, mortgage bonds issued by Fannie Mae and Freddie Mac and lending to private investors to buy more bad bank debt. The Federal Reserve has an unlimited ability to lend because it can create more money. In the last six months the basic measure of money in the United States, or M-1, has grown at a 14.3% rate even as the economy has shrunk. But continuing to print money could also lead to a crisis in confidence in the U.S. economy and a falling dollar. Fears of inflation are also bound to rise, which would also lead to higher interest rates.

Despite the rush to embrace, or to damn, the growing federal budget deficit as a new ‘New Deal’ by some on the left or the right, the actual stimulus to the economy is small. When the financial market bailout and drop in tax revenues is taken out, the increase in the federal government spending on goods and services has only been about $130 billion over the last six months. Almost half of this increase in spending is offset by spending cuts and tax increases by state and local governments, leaving the net stimulus at only 1% of GDP.

The other problem with this increase in government spending (based on the ideas of Depression-era economist John Maynard Keynes) is that it does not deal with the huge overcapacity in auto, construction, retail, airlines and other industries. Keynesian government deficit spending only can address one side of the crisis of overproduction that the economy is going through, the shortfall in spending. It does not deal with the overbuilding done by the capitalists in their competition for more markets and greater profits.

The reality is that neither the New Deal nor even the military spending of World War II alone solved the crisis of overproduction of the Great Depression. The rebuilding of factories, machinery and buildings that decayed during the decade of depression, or that were destroyed during World War II, also laid the basis for the post-World War II economic growth. It is no coincidence that soon after the economies of Europe and Japan recovered from the war in the 1960s that a new crisis of recession and inflation hit the world capitalist economies in the 1970s.

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