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September 14, 2009

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Record high federal deficit sparks worry over Treasuries

THE United States federal deficit surged higher into record territory last month, hitting US$1.38 trillion with one month left in the budget year.

The soaring deficits have raised worries about the willingness of foreigners to keep purchasing Treasury debt. China, now the largest foreign owner of US Treasury securities, has expressed concerns about runaway deficits. Treasury Secretary Timothy Geithner and other administration officials have sought to address those concerns by insisting that once the recession is over and the financial system is stabilized, the administration will move forcefully to get the deficits under control.

However, Republican critics contend the administration does not have a credible plan to address future deficits. Private economists worry the country could face the prospect of seeing interest rates soar in future years and the dollar weaken as foreigners dump their US holdings.

The Treasury Department last Friday said last month's deficit was US$111.4 billion, below the US$152 billion that economists expected. Still, the imbalance added to a flood of red ink already accumulated through the recession and massive spending needed to stabilize the banking system.

The Obama administration last month trimmed its forecast for this year's deficit to US$1.58 trillion, from an earlier US$1.84 trillion. The recovery of the banking system led to the reduced estimate as it meant the administration did not need to get an additional US$250 billion in bailout support for banks.

The US$1.58 trillion estimate for the full budget year signals that the administration expects the imbalance this month to be about US$200 billion. That would be a sharp deterioration from September 2008 when the government closed out that budget year with a US$45.7 billion surplus.

Many private firms have slightly smaller deficit estimates for the full year but all agree that this year will be a record-holder by a large margin. The previous record deficit was US$454.8 billion last year.

The administration is now projecting the deficit over the next decade will total US$9 trillion, US$2 trillion more than its previous estimate.


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