U.S. Govt. July Budget Deficit Crosses $180 Billion.

The budget deficit for the month of July has reached $180.68 billion as the U.S. government struggles to pull the economy out of recession.What isn't helping matters is that because of the economic slowdown tax revenues have also taken a beating. The millions of unemployed people and falling corporate profitability has led to sharp declines in both personal and corporate tax receipts this year.Total receipts have fallen $354 billion or 17% from the same period in fiscal 2008. Government spending on the other hand has risen by $524 billion or 21% during the same period.The wars in Iraq and Afghanistan as well as the bailout packages announced by the government for various sectors of the economy have all contributed their bit to this mess. The net result is a deficit exceeding $1 trillion in the first ten months of this fiscal. It is predicted that the total deficit will reach $1.84 trillion by the end of this year, almost 12.9% of total G.D.P. However this figure is projected to decline to a deficit of $1.26 trillion in 2010,as the economy recovers and also because of cost cutting measures taken by the government.Almost 121 programs have been axed!

So far the Fed has got away with it. But there is no way it can duck the uncomfortable question, of how it plans to finance this deficit going forward, for ever. Various creditors of the U.S., particularly the Chinese have already made it clear that they are worried about their investment in U.S. Treasuries and would not mind looking for a substitute. They fear that reckless U.S. government spending will cause inflation to spike, forcing the government to increase interest rates. This will reduce the value of their existing holdings. Moreover inflationary pressures will dampen U.S. economic growth which will weaken the U.S. dollar further. This too would lead to losses on their investments in U.S. Treasuries. If they slow down future purchases of U.S. government bonds the Fed may have to raise interest rates more sharply than it wants to. This may threaten the fragile economic improvement that we are witnessing right now.

President Obama on his part is attacking his critics."The recession was years in the making, it didn't just start last month.The bank crisis did not happen on my watch.Let's get the history straight,"he said. But his approval ratings have slipped to about 50% now, the lowest since his inauguration. If he fails to get his health care bill through it would signal that finally the American voter is beginning to oppose his policies.