It’s all about deficits these days. The challenge is figuring out what it all means for the markets, the economy, the man on the street and for politics in Washington. What’s crystal clear at the moment is that there’s a bull market in red ink. That’s hardly a surprise, although the debt estimates continue to creep higher. That latest example comes from the Congressional Budget Office, which published a new analysis on Friday of President Obama’s budget outlook. The CBO concludes that the projected deficit for the decade ahead will be $1.2 trillion more than the White House predicts.

The reaction from the Republicans is predictable. “The news today from CBO is clear: The president’s budget will continue to lead our nation into a fiscal catastrophe—an ever worse one than the president’s own numbers suggest,” says Paul Ryan (R-Wisconsin), a Republican on the House Budget Committee, via BusinessWeek.
The White House begs to differ, of course, arguing that it’s making the best of a bad situation. “That is why even as we increased our short-term deficit to rescue the economy, we have refused to go along with business as usual, taking responsibility for every dollar we spend, eliminating what we don’t need, and making the programs we do need more efficient,” the administration’s Office of Management and Budget asserted when it released its forecast last month.
Perhaps the question is whether the budget plans are too heavily focused on spending, or weak on raising sufficient revenue to pay for the plans. The answer depends on your perspective. Consider this excerpt from CNNMoney.com:

The CBO cited two big contributors to the jump in debt.

One is the president’s proposal to extend the 2001 and 2003 tax cuts for the majority of Americans. The other is the proposal to protect middle- and upper-middle-income families from having to pay the Alternative Minimum Tax (AMT).

Together those proposals would cost $3 trillion between 2011 and 2020.

“It points out the unwillingness of the administration to raise the revenues to pay for the size of government being proposed,” said Robert Bixby, executive director of the Concord Coalition, a deficit watchdog group.

Is the Obama administration a victim of its own optimism? Not necessarily, says Jim Horney of the Center on Budget and Policy Priorities. “It’s not that the administration has a rosy scenario, but the CBO is a little less optimistic about income growth,” he tells The Hill.
Regardless of one’s political views, the rising level of debt is affecting the public’s attitude. “More than twice as many U.S. adults (58%) say that debt owed to China is a more serious threat to the long-term security and well-being of the U.S than is terrorism from radical Islamic terrorists (27%),” according to a new a new Zogby poll. What’s more, there was little variation by political affiliation. Democrats, Republicans and independents were in agreement by a wide margin that debt was the number-one threat.
The big question is when (if) the bond market’s views will change. The benchmark 10-year Treasury remains in the upper 3% range, where it’s been since last summer.

The muted outlook on economic recovery is one reason. But the real issue is deciding how long the fixed-income set will stay calm and give the government the benefit of the doubt. There’s a compelling argument for thinking that the price of money should stay low in a time of diminished expectations. Unfortunately, that’s just an assumption and it’s not clear that it’s written in stone.