What Are the Dangers of Trillion Dollar Deficits?

US President-elect Barack Obama raised some eyebrows earlier this week when he warned that there might be "trillion dollar deficits for years to come".

Deficits have been soaring in recent years, and are looking to be even bigger for at least the next 2-3 years. The 2009 deficit is expected to be around $1.2 trillion dollars, while the 2010 deficit is expected to be around $700 billion dollars. The 2010 deficit forecast is already being met with muffled sounds of laughter, as most expect that this number will easily soar north of $1 trillion dollars.

Both the 2009 and 2010 deficit numbers are expected to grow with the passage of an economic stimulus package.

The total US public debt is currently sitting at around $10.64 TRILLION dollars. In the 2008 fiscal year, the US government spent $412 billion dollars just to service this debt.

The interest paid out by the US government to holders of its debt represents one of their biggest expenses. A much bigger expense than the Department of Energy, Department of Homeland Security or the Department of Education. The dollar figures are in the same neighborhood as the costs to fund the nation's defense spending, health and human services and social security administration costs.

With the deficits expected to top $1 trillion dollars over the next couple of years, many people are starting to wonder just how much debt the country can take on before it starts to buckle under the strain.

A $1 trillion dollar deficit is never a good thing. Here are some of the problems that might arise from such a large deficit:

1. Falling Credit Ratings. There is a very real chance that the United States may lose its AAA credit ratings if these monstrous deficits continue.

2. Exodus From the Dollar. If the US lost its sterling credit rating, then interest rates would rise, other countries would dump US debt and sell US Dollars as well.

3. Rising Inflation. A weak dollar plus rising interest rates = inflation. The end result of these sky-high deficits will very likely be soaring inflation - I just don't see a way around it.

If these trillion dollar deficits aren't upsetting to you, then they should be.

Filed under: The Economic Meltdown