Deficit…what it means to you & me

One and a half trillion dollars, or if you prefer; $1,500,000,000,000.  The federal deficit—which is the difference between the revenue the government raises and amount it spends, per year.  The incredible magnitude of this year’s shortfall was hardly unexpected, since the so-called stimulus law will cost 787 Billion.

What does this mean to us?  The GDP, which is the value of all goods and services produced in this country, was approximately $14.2 Trillion in 2008.  The deficit then was close to 7% of the GDP, a level that hasn’t been reached since World War II.  The deficit spending/GDP ratio is usually a good indicator where interest rates are headed. 

When the ratio is high, as it is now, interest rates will increase.  As the billions of stimulus dollars eventually find their way into the economy, the effect will be inflationary.  keep in mind that much of the stimulus money hasn’t been spent yet.  The Administration suggests that will happen next year. And the Federal Reserve has indicated it doean’t intend to raise short-term rates, so infaltion shouldn’t be a threat in the short term.