The 2010 budget is here and it's one for the record books. Media reports forecast that the nation's budget deficit will hit $1.6 trillion in fiscal 2010, a fresh record and the biggest since World War Two.
Ballooning debt levels are a serious concern for investors as the dollar's strength will continue to be called into question as the massive U.S. debt continues to swell. And this year's budget is of little comfort to those hoping for fiscal restraint.
While the administration hopes to demonstrate, through a governmental spending freeze, its desire to restrain government spending, my opinion is that Obama's budget proposal, to be released at 10 a.m. EST, will not be a restrained one and will be focused on continuing to provide lubrication to a straining economy.
There are some efforts aimed at increasing revenues (by increasing taxes) particularly aimed at the so-called "wealthier population" with income greater than $250,000 per year. The elimination of previous Bush administration tax cuts is likely a first step in a redistribution of wealth strategy, which will be the focus of reducing budget shortfalls. Additionally, taxes are proposed for energy companies and financial institutions to help reduce the revenue shortfall. While these may put a dent in deficits, the resulting impact could very well be detrimental to overall economic growth. Taxes, in general, tend to reduce economic activity. But in a populist environment, that lesson may be easily forgotten.
Bottomline - investors should watch carefully how the budget process plays out. Investment decisions will be impacted by the proposals that are actually implemented. It would be a mistake to think, in the end, that the 2010 budget outcome is irrelevant.
The truth is: the 2010 budget is a turning point for US economic prospects. Too much debt and the world will lose confidence in the US economy. Too much taxation and growth will be curtailed. And too much debate (with not enough action) and markets will flounder. It's an important year for the United States and its future economic prospects to be sure.
Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top investment 100 advisors in the United States for 2009 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at firstname.lastname@example.org.