The Fed’s Flow of Funds came out last Friday and that gives us an update on the sectoral balances. You can see that the government’s deficit continues to provide a big boost to the private sector at a time when it’s still very much needed. The good news is that we’re beginning to see signs of life in credit and investment, but the private sector remains far too weak by my calculations to run with the baton here.
The biggest risk to the economy continues to be a sharp contraction in the budget deficit. And if the CBO is right about the 2013 estimates that could be precisely what we get. My guess is the cuts in the CBO outlook are unrealistic and the new President (or returning President) will use the beginning of his term to bolster the economy through continued tax cuts (most likely given the political environment). That is of course unless the President decides to go all Bill Clinton on us in his second term and convince Congress and America that we need to bring in more money before we can spend it….