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Let's Get Real About Deficits

Peter Schiff
Oct 13, 2006

This week, while President Bush took credit for supposedly cutting the enormous budget deficit in half, the Commerce Department reported that the trade deficit in August was a record $69.9 billion. Annualized, the trade gap comes to well over $800 billion of foreign-made merchandise tacked onto our national charge card, a figure that dwarfs the federal budget deficit by comparison.

In the first place, the fact that President Bush maintains a straight face while claiming to be a deficit cutter is a testament to his political skills and the media's and Wall Street's gullibility. Who does the President think he is kidding? So far, the national debt has increased by about three trillion dollars during his presidency, or about $500 billion per year. Those are the real numbers. The non-sense budget deficit the government reports excludes off-budget items and money borrowed from government "trust funds." However, expenditures excluded from official budget numbers still must be financed, and the money borrowed to do so adds to the national debt. In addition, those numbers do not reflect expenses accrued during the year but not yet paid. Were such expenses properly accounted for, the official deficit would be several hundred billion dollars higher. Finally, the numbers do not include any growth in contingent liabilities, which now exceed $40 trillion, making the actual national debt over eight times the official figure, which includes only the funded portion.

While President Bush claimed credit for restraining federal spending, his 2006 budget included a record $2.65 billion in outlays, a 7.4% increase over the prior year. Spending on education increased 28%, Medicare spending rose by 12.5% and interest payments on the debt rose 15%. Tax revenue also rose to a new all time high of more than $2.4 trillion. So just what is it that the President is bragging about? Presiding over the fourth largest budget deficit ever (after having presided over the largest) while simultaneously being the biggest tax and spender in our nation's history?

In the second place, how can the President's disingenuous claims of deficit reduction attract media attention, while the record high trade deficit is virtually ignored? The budget deficit merely reflects what the government borrows, while the trade deficit reflects what the entire nation borrows. For the President to proclaim that the U.S. economy is healthy despite the record trade deficit is like a doctor declaring a patient healthy while ignoring the basketball sized tumor growing in his intestines.

The combination of enormous budget and trade deficits reflects a terminally ill American economy. Both the public and private sectors borrow to consume, while the domestic economy lacks the savings or productive capacity necessary to support either. Foreign savers/producers sacrifice their own desires merely to indulge ours, artificially strengthening an otherwise dying economy. However, my guess is that before the end of the Bush term, foreigners will finally pull the plug.

Now that gold appears to have bottomed visit to discover the best way to buy it.

Peter Schiff
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
1 800-727-7922


Mr. Schiff is one of the few non-biased investment advisors (not committed solely to the short side of the market) to have correctly called the current bear market before it began and to have positioned his clients accordingly. As a result of his accurate forecasts on the U.S. stock market, commodities, gold and the dollar, he is becoming increasingly more renowned. He has been quoted in many of the nation's leading newspapers, including The Wall Street Journal, Barron's, Investor's Business Daily, The Financial Times, The New York Times, The Los Angeles Times, The Washington Post, The Chicago Tribune, The Dallas Morning News, The Miami Herald, The San Francisco Chronicle, The Atlanta Journal-Constitution, The Arizona Republic, The Philadelphia Inquirer, and the Christian Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg. In addition, his views are frequently quoted locally in the Orange County Register.

Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkley in 1987. A financial professional for seventeen years he joined Euro Pacific in 1996 and has served as its President since January 2000. An expert on money, economic theory, and international investing, he is a highly recommended broker by many of the nation's financial newsletters and advisory services.

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