Stocks have been up lately, but is it time to feel better about the economy?

Not if you take a look at the action of the Federal government. Washington is currently racking up unprecedented record deficits. For the 2009 budget year, which ended on September 30, the government's balance sheet showed a record deficit of $1.42 trillion, an all time record.

Despite that dubious record, the spending free-for-all continues unabated. According to the Associated Press, "October was the 13th straight month to show a monthly deficit — another record. It was the fifth-largest monthly deficit ever."

Moreover, the government's record deficit spending is not likely to end any time soon. According to AP, the Obama administration "projects the deficit will remain above $1 trillion in 2011. In fact, according to estimates it made in August, the deficit will never drop below $739 billion over the next decade."

There will be consequences for this deficit spending. In this, government is no different than individuals. If someone consistently spends more than they can generate in income, eventually a debilitating debt is likely to result. Government is no different. By spending far more than it takes in, the federal government has saddled us all with a staggering debt totaling $11.9 trillion.

The situation is likely to get even worse than the predictions coming from the Obama administration. Writing for News Busters, business and money writer Tom Blumer points out the little reported fact that in October the government paid out "an astonishing $4.5 billion more in refunds to corporations than it collected." In addition, Blumer noted, "year-over-year collections of individual income taxes we down by 29%."

If these trends continue, deficits will be even larger than expected and the overall debt will grow even more.

Unfortunately, there is even more bad news. While government continues to bleed the economy dry by spending money it doesn't have, Congress continues to work on huge new programs that will virtually guarantee the end of American prosperity. In particular, there are twin monstrosities that are highly favored by the Democrats that will likely be signed into law during the Obama administration if the present Congressional leadership has its way. The first, of course, is the health care bill, which, in whatever form it is passed, will bring with it dramatic new costs. The other is cap and trade, which may not make it out of Congress this year, but might finally be passed in 2010. This bill will result in huge new costs for everyone.

If these bills are passed, the economy will not grow, and it will probably shrink. Meanwhile, as tax receipts fall due to the shrinking economy, we know from the Obama administration's own admissions that government spending will continue to soar. This is an untenable situation.

To try to keep the house of cards from falling down, government will almost certainly do two things.

First, taxes will increase, perhaps radically. The Democrats, of course, never heard of a tax they didn't like, and as long as they retain the leadership of the Congress and keep a president in the White House, new tax proposals are an almost certainty. But this is a zero sum game. Reduced tax receipts will prompt government to try to increase them by raising taxes, which will perversely result in more economic shrinkage and reduced tax receipts. It will be a very uncomfortable ride down the right-hand side of the Laffer curve.

The second thing government will do will be to increase a hidden tax — it will increase the money supply, thereby reducing the value of the dollars people hold.

This is a great scheme for a debtor nation. Sell debt instruments at current dollar values, and pay them off in future inflated dollars. The fact that the U.S. is likely to do just this — as it has already been doing, in fact — is the reason why the Chinese are worried about the value of the dollar. They hold the largest portion of U.S. debt, and it has begun to make them nervous. In April the New York Times spoke to Yu Yongding, "one of the Chinese government's top monetary economists," according to the Times. Speaking about the monetary relationship that exists between the two countries, he said he believes it currently favors the United States. Citing a saying attributed to John Maynard Keynes, he said: "If you owe your bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at your mercy." The Chinese would not be happy to see the value of their investment in dollars wiped out by Federal Reserve inflationary policies.

And yet, those policies are in place now. Writing in the "Economix" column of the New York Times on November 12, economists Peter Boone and Simon Johnson described what the future may hold:

The idea that the American dollar might follow emerging markets such as Russia in 1998 and Argentina in 2002, or Britain in the 1970s — and so depreciate by 50 percent or more in a relatively short time — is certainly implausible now. But such a “doom scenario” is not unrealistic in the future without change.

Their final conclusion is too optimistic. As long as the big spending internationalist politicians that have run Washington for decades remain in power, there is no way out of the death spiral that has been engineered by the federal government without seriously harming the prosperity of the average American citizen. Massive deficit spending will continue. Debt will grow, massively. Taxes will increase dramatically. The money supply will continue to be inflated.

The future looks bleak indeed.

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