Banana Republic Deficit
by Robert Higgs
Issue 125 - February 4, 2009

The Congressional Budget Office (CBO) now reports “the [federal budget] deficit this year will total $1.2 trillion, or 8.3 percent of GDP” (report). This seems about right for a banana republic. The bad news is that neither commercial banana cultivation nor a republican form of government has proved viable in this country.

Bananas, of course, must be imported into this country from Latin America and other places where their commercial cultivation has proved profitable.

The CBO’s projection does not take into account any addition to the federal budget deficit that may arise from enactment of a “stimulus” bill after the Obama gang takes charge of administering the empire. If the magnitudes now being discussed for this so-called stimulus should prove to be in the right range, the deficit for fiscal year 2009 may turn out to be not $1.2 trillion, but something in the neighborhood of $2 trillion, perhaps 15 percent of GDP. If so, the deficit will be as large in amount as the entire federal budget was as recently as 2002. This prospect may be what cranky commentators such as yours truly have in mind when they speak of “out-of-control federal spending.”

The 2009 deficit arises in part from the CBO’s taking into account outlays of $238 billion as the net subsidy costs for Fannie Mae and Freddie Mac, plus $18 billion of cash infusions from the Treasury to Freddie and Fannie. It is entirely possible that the estimated net present value of Fannie and Freddie’s future earnings will prove to be too large, and therefore that the subsidy will be greater than projected and the overall federal budget also greater by that extra amount.

With little fanfare, the CBO report ventures to mention that “foreign lenders, who have recently been willing to lend to the U.S. government on very advantageous terms, may become less willing to do so in the future, which would tend to raise interest rates in this country.” To be sure. Indeed, if the Japanese, Chinese, and Arabs, who have been carrying a major part of the load in covering the federal deficits in recent years, should substantially reevaluate the risk of dollar depreciation (or even U.S. repudiation of its debt) and greatly reduce their purchases of U.S. Treasury securities, then drastically higher interest rates and, in response, hyperinflation (with or without price and wage controls) might well be the next chapter of this unpleasant story.

Meanwhile, my advice is: eat bananas while they are still available from producers who will accept U.S. dollars in exchange for them. If the U.S. dollar is totally destroyed, as recent and impending government actions suggest it might be, then we may be reduced to barter, at least for a while. I wonder if we can trade Hollywood films for bananas. And, most important, I wonder whether I can get a job in the movie business, perhaps as an extra for the crowd scenes. I think I have the talent needed for that role.

Robert Higgs is a Senior Fellow at the Independent Institute