Late on Friday, the Treasury Department released the budget deficit for August. It came in at $111.4 billion, which was far better than the $140 billion monthly shortfall that had been expected.

It was also slightly less than the budget shortfall in August 2008.And it was a huge improvement over the $180.7 billion deficit in July.However, don't get too excited about the month-to-month decline as the monthly budget deficit numbers are extremely seasonal. Although that seasonality is reason to be very optimistic.

Not long ago, the projections for the fiscal 2009 budget deficit were running at about $1.8 Trillion.11 months now under our belt (the Government's fiscal year ends in September), the cumulative deficit is now $1.38 Trillion. Thus if September were to come in at the same level as August, the deficit for the year would end up at $1.49 Trillion.

However, it is extremely unlikely that September will come in at the August level. It is almost a sure thing that the September deficit will be significantly less than the August deficit.?As a matter of fact, since 1980, the Federal Government has run a surplus in September with only four exceptions, the last of which was in 1991 (the others being 1989, '86 and '82). Thus, having a balanced budget for the month is actually a fairly conservative estimate. In 2008, the September surplus was $45.7 billion.

Now if we do run a surplus in September, don't get too excited -- we will be back to running a deficit in October. However, there is a very real possibility that the budget deficit for fiscal 2009 will come in at under $1.4 Trillion -- a $400 billion improvement from where we thought it was going to be at the start of the summer.

The key is that the stabilization of the economy has led to a stabilization in tax revenues.?It looks like the fears about near-term budget deficits were way overblown.

Now, I don't want to suggest that $1.4 Trillion is small -- it isn't, and it is a record any way you cut it. It is almost 10% of GDP.?However, it is one heck of a lot smaller than $1.8 Trillion.

I am not particularly worried about short-term deficits. In an economic downturn, we need them. Remember the old Y = C + I + G + (X-M) equation:? in a downturn, C (Consumption) shrinks -- and this time around C has to shrink by much more than normal given the huge overleveraging of consumer balance sheets.?We have allowed C to become far too large a part of the economy at 71%.

It was not always thus: since the end of WWII, Consumption has only averaged 64.7% of the economy. If consumers are not spending, then businesses are not going to invest to increase capacity. And anyway, in recent decades when businesses have invested to increase capacity, they have not done so in the U.S. -- they have spent the money in Asia.?Thus I (Investment) also falls.