New Budget Estimates Inflame the Crisis — But There’s a Contrarian View
Author: Greg Valliere
February 16, 2023
DEFICIT ESTIMATES ARE WORTHLESS in the “out years,” they’re simply educated guesses, but estimates for this year and next are important. CBO embraced an exceptionally gloomy forecast — GDP will expand just 0.1% this year, the CBO said.
THE UNEMPLOYMENT RATE will rise to 5.1% at the end of the year, CBO said — even though it’s at 3.4% now, the lowest rate in 53 years. Embracing a very conservative estimate of long-term economic growth — below 2% — CBO projects the deficit will rise by another $19 trillion over the next decade.
THIS INFLAMED THE BUDGET BATTLE in Washington, because the U.S. faces a debt default crisis this summer. The next development will be release next month of the Biden budget, which will be overly optimistic on deficits. A Republican budget later this spring will call for enormous spending restraint, possibly a spending freeze.
A CONTRARIAN VIEW: There haven’t been any economic studies — none — that blame budget deficits for higher interest rates. The bond market can live with high deficits; it cannot live with high inflation. Deficits surged in many countries in the past few years, but until recently bond yields in those countries were below zero. Only when inflation emerged did yields head higher; deficits were not the primary factor.
OBVIOUSLY, DEFICITS OF $2 TRILLION ANNUALLY for the rest of this decade raises the risk of higher interest rates, but if the Federal Reserve can get inflation under control, these deficits probably can be accommodated, as usual. A wide range of federal spending might be “crowded out” in this scenario, but inflation would not be the primary risk.
THE CBO’S DOUR REPORT highlights what was already known — spending cuts are virtually impossible because of Social Security and Medicare, which will not be curbed. And some parts of the budget will have to increase — defense spending, aid to Ukraine, etc. Inflation eventually will subside, but the medicine — tight-fisted monetary and fiscal policies — will slow the economy more than inflation could.
* * * * *
AFTER THE BALLOON CRISIS, any sign of improvement in U.S.-China relations would be welcome — and there’s a chance that Secretary of State Antony Blinken will meet with his Chinese counterpart at a security conference this weekend in Munich.
SOURCES REPORT THAT BLINKEN is considering a brief meeting, perhaps coupled with a pledge that the two officials will meet by spring for a more substantive session. This hardly will resolve the tension between the two countries, but it might lower the temperature by a couple of degrees.
* * * * *
QUOTE OF THE WEEK: “America is not past our prime,” Nikki Haley said yesterday. “It’s just that our politicians are past theirs.” That’s not just a dig at 80 year-old Joe Biden — it clearly targets Donald Trump, 76. Age will be a huge issue in the upcoming election.
* * * * *
WE’RE OFF TOMORROW and Monday is a holiday in the U.S. and Canada. We’ll be back on Tuesday morning.
The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is a registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. Our companies deliver excellence in investing in the public and private markets through three business lines: AGF Investments, AGF Capital Partners and AGF Private Wealth.
AGF brings a disciplined approach, focused on incorporating sound, responsible and sustainable corporate practices. The firm’s collective investment expertise, driven by its fundamental, quantitative and private investing capabilities, extends globally to a wide range of clients, from financial advisors and their clients to high-net worth and institutional investors including pension plans, corporate plans, sovereign wealth funds, endowments and foundations.
Headquartered in Toronto, Canada, AGF has investment operations and client servicing teams on the ground in North America and Europe. AGF serves more than 800,000 investors. AGF trades on the Toronto Stock Exchange under the symbol AGF.B.
For further information, please visit AGF.com.
©2025 AGF Management Limited. All rights reserved.
