In the past few days, the government released separately two numbers showing record deficits: The final fiscal year 2004 federal budget deficit of $413 billion -- the highest dollar value on record A monthly trade gap in August rising to $54 billion -- the second highest on record.

In the past few days, the government released separately two numbers showing record deficits: The final fiscal year 2004 federal budget deficit of $413 billion -- the highest dollar value on record A monthly trade gap in August rising to $54 billion -- the second highest on record.

Federal Budget Deficit

The final numbers show that the deficit has increased by $38 billion over the previous year's $375 billion. A recent report from the Center for American Progress documents the 2000-2004 period as having the largest deterioration in the deficit situation in the last 50 years, with the size of the swing from surplus to deficit in the amount of 6.1 percent of GDP (including the Social Security surplus).

Meanwhile, the government has reached its own statutory limit on the national debt and Treasury Secretary Snow is undertaking accounting tricks to prevent breaching it until after the elections (see debt ceiling article this issue).

Trade Deficit

The trade deficit has continued to grow. The monthly trade deficit that stood at just $10 billion in 1998 is more than five times that today. While a trade deficit may not be harmful in the short run, in the long run a large trade deficit carries greater risk of financial turmoil -- and the possibility of economic crisis.

The relation between budget and trade deficits is very complex. For an overview see Budget and Trade Deficits: Linked, Both Worrisome in the Long Run, but not Twins

This recent speech by the Federal Reserve Governor highlighted this risk:

"In the long run, however, both deficits could become much more worrisome. ... At some point, continued large-scale trade deficits could trigger equilibrating, and possibly dislocating, changes in prices, interest rates, and exchange rates. Continued budget deficits will steadily detract from the growth of the U.S. capital stock and may also trigger dislocating changes."