Speaking with CNBC’s Squawk Box Asia hosts Martin Soong and Karen Tso early Monday morning, editor & publisher of the Gloom Boom Doom Report Marc Faber expects a minimum of $1.5 trillion U.S. budget deficits for some years to come.
“I don’t think it is possible to reduce the deficit meaningfully unless you increase taxation significantly, unless you cut spending meaningfully,” said Faber. “And therefore, having the Democrats on one side of the aisle and the Republicans on the other, I don’t think they will compromise. I think the debt ceiling will be increased—yes—but I think deficits will stay around minimum $1.5 trillion for the foreseeable future.”
If Faber’s prediction comes to pass—coupled with Goldman Sachs chief economist Jan Hatzius’ recent downward revision for 2011 U.S. GDP of $14.91 trillion—the U.S. deficit, as a percent to GDP, calculates to a Portugal and Greece size fiscal problem of more than 10 percent.
Of the $38.5 billion in cuts to the federal budget hammered out between President Obama and Republicans, only $352 million in savings was actually cut for this fiscal year, according to the Congressional Budget Office.
Now that the budget has been finalized without any substantial consideration to cutting entitlement programs, raising taxes drastically, or a combination of both, Faber suggested that the U.S. is on track for unsustainable deficits and repeated raises to the debt ceiling.
Who will be forced to pay for budget shortfalls is the age-old question that both political parties face. But both Democrats and Republicans won’t agree to forge politically unpopular solutions and face an already-angry, anxious and financially struggling constituency. Instead, both parties have taken a familiar politically expedient course—that is, to kick the can down the road until after the next election.
“I think the Democrats want the well-to-do people to accept higher taxes, the well-to-do people want to accept essentially the lower-income groups to accept lower spending,” Faber continued. “So they will not agree.”
“But both benefit from high deficits. The Democrats because they get handouts, although these handouts are eaten up by inflation. In other words, price increases . . . (audio cuts out), so in real terms their incomes don’t go up. But, maybe, they don’t see that this way. And the Republicans, they don’t have increased taxation, so they also believe they benefit. And in addition to that, there is a lot of spending that benefits well-to-do people, like defense expenditures,” he said.
When asked to comment on a bi-partisan committee in Washington that has identified $4 trillion in budget cuts over 12 years, Faber was amused by the attempt to temper his dire view of the U.S. budget deficit and the implications for the American dollar.
“There have always been deficit reduction plans, and none of them were sic kept because of politics and of the economic situation,” he chuckled. “I think maybe you can cut the deficit from say $1.5 trillion down to $1.4 [trillion] dollars, by a $100 billion, or so. But they argue now for almost six months to cut the deficit, or reduce the deficit, by $40 billion. What does it matter, $40 billion on $1.5 trillion dollars?”