Deficit crosses above 10% GDP, a level not seen since World War II

With the recent monthly release of the US Federal Budget deficit by the Congressional Budget Office, 2010 is shaping up to break the record for the largest federal budget deficit projected at approximately $1.5 Trillion (Figure 1.0). This will send the % to GDP metric above the 10%+ mark, the highest level since the World War II range of 22%-28% in 1943-1945.

Figure 1.0 - US Federal budget deficit

With the frequency of US debt issuance at these historical low rates, one has to question when the future credibility and reliability of the US economy. The US government is placing a huge bet on reviving the economy with a large dose of stimulus funding, but with the market continue to have patience as the currently approved stimulus has run its course? And what will be the reaction of yet another stimulus package?

There will be a time of reckoning as the the current yields will not be enough reward as the deficit grows and other foreign investors (ie. China) will want to diversify their holdings away from a concentrated US Treasury portfolio. Only time will tell, but many others do agree and have posted similar concerns on the below blogs:

Kurt Brouwer at Seeking Alpha

Peter Suderman at Reason.com