Record deficit demands Obama start acting now

NEW YORK (Reuters) - The United States'' skyrocketing red ink is making investors increasingly anxious and they want President Barack Obama to take concrete steps on Wednesday toward reducing the nation''s $1.4 trillion budget deficit.

The record deficit for the world''s largest economy now amounts to 10 percent of gross domestic product, the highest since World War Two and more than triple the 3 percent mark that economists generally see as a manageable maximum level.

That debt load has stirred investor fears of a weakening dollar, deterioration of the country''s prized AAA credit rating and a huge supply of government debt that will drive yields higher, hurting both corporations and consumers.

Looking further out, many worry that if the federal government doesn''t take control of its ballooning costs, the United States could face the same kind of stagnating economy that gripped Japan in the 1990s.

"If we can''t get the deficit down to 3 percent GDP in about three years, you have ballooning interest payments that are unsustainable," said Ira Kalish, director of global economics for Deloitte Research in Los Angeles.

Kalish gives the Obama administration about three years to implement a plan and avoid such dire scenarios.

Obama is expected to emphasize a commitment to tackling those concerns and the budget shortfall when he delivers his State of the Union address on Wednesday at 9 p.m. (0200 GMT Thursday).

Administration officials said late on Monday that Obama is seeking a three-year freeze on many domestic programs in his new budget with a goal of saving $250 billion by 2020.

"Obama certainly will address the budget and finance issues because it''s paramount in investors'' minds," said Margaret Patel, a senior portfolio manager at Evergreen Investments in Boston. "I would expect to hear some kind of plan that over time reduces the deficit."

While the justification for the huge deficit was that the economy was on the brink of financial collapse, "now he must address some kind of long-term policy," Patel said.

Many analysts characterized Monday''s budget freeze announcement as symbolic because the savings are relatively small and come on the heels of recent setbacks.

Obama is seeking to push forward his budget and calm investor nerves in the wake of a shocking seven days for Democrats, who lost the Massachusetts Senate seat last week, after which Obama also made a surprise announcement of a proposal to curb risk-taking by banks.