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Add Another Trillion
In the midst of the hullabaloo last week over the deal in Washington to end the shutdown of the U.S. government, a little fact missed the attention of most reporters and media outlets. The public debt of the United States is now in excess of $17 trillion.
Technically, the debt ceiling was reached in May and has been stuck at the same level for months. As a result of the continued receipt of federal taxes and other “extraordinary measures” employed by the U.S. Treasury, the nation was able to stave off default until the debt ceiling was raised again. When the debt deal was struck, the official debt of the U.S. increased $329 billion in a day. As a result, the official tally of the debt increased from $16.747 trillion to $17.076 trillion.
Stop and think about that for a moment. While many politicians are touting their accomplishments of deficit reduction and fiscal restraint, the U.S. still overspent by $329 billion in less than 5 months. While it’s an improvement over the recent annual deficits in excess of $1 trillion, the deficit is still projected to be $700-800 billion this year.
While I don’t necessarily agree with their tactics or timing, I do commend those who attempted to draw attention to the continuous deficit spending and rising national debt. Shutting down the government was a drastic step, and in the end, it probably did little to change the current policies or debate. However, it seems painfully obvious that something drastic needs to happen for our national leaders to get in touch with the reality that it’s impossible to borrow trillions of dollars forever.
It wasn’t very many years ago when adding another $1 trillion to the national debt would have been headline news. Sadly, we keep breaking the next trillion-dollar mark so quickly, it barely garners anyone’s attention. Of the $17 trillion we owe, nearly 40% of it has been borrowed within the past five years.
If you share the belief of many politicians, pundits and economists that the continual rise of the debt is not an immediate concern, then you probably won’t pay much attention as the debt continues to increase another $1 trillion in a few months.
If you think the perpetual rise of our debt poses a threat to our long-term security and prosperity, you’re probably frustrated that we reached another trillion-dollar milestone and will probably break the $20 trillion mark in the next couple of years. It can be disconcerting to see the lack of concern over this issue, but don’t give up. Now more than ever, you need to speak up and press for change. It may not happen quickly or easily, but if you don’t speak out, who will?
Breaking the $17 trillion mark may have gotten lost in the noise of the deal to end the shutdown and avoiding possible default by the U.S. government. Whether the lack of coverage was accidental or intentional, this is equally important. The shutdown and debt ceiling were an immediate crisis, but the continuous overspending and borrowing by our government is slowing creating a future calamity, which will make the last predicament seem like a nonevent.
Sequestration: The Destruction of a Nation?
Unless there is a last-minute deal in Washington, which no one expects to happen, the reductions in federal government spending known as sequestration will start tomorrow. Some politicians, economists and leaders have shrugged off the cuts as having a negligible effect on the economy and government services, while others are predicting a near cataclysmic effect.
The following are just some of the claims made by President Obama and others opposed to the cuts.
- Police, fire and other first responders will be laid off.
- Classroom sizes will swell as teachers lose their jobs.
- Air travel will become more dangerous when traffic controllers are let go.
- Security lines at airports could be 4 hours long when the TSA is forced to trim its ranks.
- Food will be dangerous to eat because the FDA will need to reduce the number of inspectors.
- Criminals will go free because there aren’t enough federal prosecutors.
- And my favorite… Maryland Rep. Donna Edwards says battered women will be forced to remain with their abusers because hotlines for battered women will go unanswered.
We expect a certain amount of posturing and hyperbole in political discourse, but some of the recent statements sound like fear mongering.
In reality, no one knows for sure what the sequestration cuts will do to the economy or government services. There is certain to be some effect, but if the impact is anything close to what has been predicted in the past weeks, then we are in serious trouble as a nation.
Consider these facts about the sequestration cuts.
- Total federal spending will be reduced by $85 billion this fiscal year.
- Half of the cuts are borne by the defense department and the remaining half over the other agencies.
- Total federal spending in Fiscal 2013 will be approximately $3.8 trillion.
- The Fiscal 2013 budget deficit is projected to be $894 billion.
- The sequestration cuts amount to 2.2% of all spending and would reduce the deficit by less than 10%.
- US GDP is estimated to be over $13 trillion.
- The sequestration cuts would account for 0.65% of annual GDP.
If 2.2% of federal spending and 0.65% of GDP sends our nation and economy spiraling out of control, the future is much worse than the grim predictions of the sequestration cuts. Federal spending would have to decrease by 25% to balance the budget. If a 2.2% reduction caused this kind of havoc on our society, imagine what it would be like if we had to cut spending to balance the budget.
Without question, sequestration will be painful for people directly or indirectly affected, and the across-the-board nature of the cuts probably isn’t the most effective or efficient manner to reduce government spending. However, if the current sequestration cuts can destroy our nation, we’re already destroyed; we just don’t know it yet.
The Mortgage Mess: It’s Still Messy
Even though the U.S. economy officially came out of recession in mid-2009, do you wonder why it doesn’t feel that way? There may be a lot of reasons, but I think the continued turmoil of the residential real estate market is one of the key factors.
The housing market and mortgage industry may not be as messy as it was in 2008 and 2009, but it’s still messy. TARP, HAMP and other government policies and programs may have stabilized the banking system and the financial markets, but the financial situation of many homeowners hasn’t improved much in the past five years… and for many, it’s gotten worse.
As this article cites, Zillow estimates approximately 16 million (one-third of all U.S. homeowners) owe more than their homes are worth (a.k.a. underwater). It’s quite discouraging to think that after years of slugging through this challenging economy, you might be further behind today than you were five years ago. Some areas of the country have definitely been hit much harder than others, but on a national basis, if you have positive equity in your house, one of your neighbors does not. In Las Vegas, where I live, even though thousands of people have lost their homes to foreclosure and values have decreased by approximately 50% from the peak, a whopping seven out of ten homeowners are still underwater.
There are significant economic implications for having so many homes underwater. It impacts people’s ability to relocate, puts them in a perilous financial position if their income decreases, limits their ability to refinance, and pares back their spending. However, I think the most significant factor is the psychological effect it has on their outlook about the economy, the nation and their future.
For many people, their homes represent a significant portion of their wealth. They may have spent years saving up for a downpayment or building the equity in their home, and it’s frustrating to see it wiped out in a matter of months. Granted there were some people who bought homes they shouldn’t have, took out mortgages they couldn’t afford or treated their home like a personal piggy bank. However, for millions of Americans, they simply bought at the wrong time and their homes lost value through no fault of their own.
The psychological effects of the mortgage mess should not be underestimated. Owning a home is considered to be part of the American Dream. It’s one of the reasons home ownership is much higher in the U.S. than in many other industrialized nations. Sadly, the dream of millions of Americans turned into a nightmare. Consequently, it’s only logical for people to feel apprehensive and fearful of the economy and the future, when something they thought was a sure thing (owning their home), turned out to be much more uncertain than they could have imagined. Furthermore, home ownership is a very personal matter. It’s unlike any other investment, because it’s the place where your family connects and memories are made.
Unlike the empty promises politicians often make, I won’t say there is an easy solution to the mess, nor do I think it’s likely to get cleaned up any time soon. If there were an easy solution, it would have already been done by now. Therefore, I think it’s going to be a long and arduous process to reduce the number of homeowners who are underwater.
Consequently, I don’t think we’ll see a resurgence in optimism about the economy, until the number of underwater homes is dramatically reduced. It’s hard to feel positive about the future when you feel insecure or afraid of losing the place where you live and raise your family.
Effects of the Credit Downgrade
Late Friday afternoon, Standard & Poor’s (S&P) announced it was downgrading the credit rating of U.S. Treasury securities from AAA to AA+ and retained its negative outlook. Although S&P previously announced it was considering a downgrade, the announcement was a bombshell dropped at the end of a tumultuous week of economic and political news.
- After weeks of political posturing and rancorous debate, Congress passed the Budget Control Act of 2011, increasing the debt ceiling. President Obama signed the legislation on August 2, thereby avoiding a potential default by the U.S. government.
- After the debt deal was done, Moody’s and Fitch Ratings announced they would retain their AAA rating of U.S. Treasuries but continue to monitor U.S. fiscal health.
- The Dow Jones Industrial Average ended a 9-day losing streak with a blistering 334 point decline; wiping out all of the gains for 2011.
- S&P capped the week by announcing their downgrade.
Since Friday afternoon, politicians, economists, and pundits have been discussing the impact of the downgrade. There has also been a lot of pointing fingers of who is to blame for tarnishing the image of the U.S. It has also left a lot of people wondering about the real implications of a downgrade in the credit rating of the U.S. Government.
Here are a couple of things I think you can expect from the downgrade.
- There is a bruising to the American pride and psyche. Nothing has changed since Friday, but most Americans want to believe we are the best of the best. The downgrade is likely to increase the uncertainty and pessimism of the American consumer.
- Interest rates won’t change immediately. Interest rates are effectively determined by the free markets, not by S&P. A credit ratings agency simply tries to assess the risk of a particular security, but it’s up to the market to decide the interest rate. Don’t expect interest rates to change in the near future, but there could be some upward pressure on rates if investors become more leery about the fiscal stability of the U.S. government.
- The stock markets aren’t going to crash. As anticipated, the markets were battered yesterday and lost about 5% of their value, but it’s not a direct correlation to the S&P ratings change. Remember the Dow took a 334 point hit last week before S&P made its announcement. Furthermore, the 10-year Treasury yield fell from Friday’s rate of 3.558%. This means investors bought more Treasuries; the very securities that are supposedly more risky. The selloff is more attributable to the poor outlook of the global economy and European sovereign debt worries. Investors are seeking stability, so they’re buying up Treasuries and gold.
There is one potential redeeming element which may come from the downgrade, but it’s far from certain. This might serve as a wake-up call for our political leaders to get serious about the fiscal future of our country. As I wrote last week, the debt deal was long on promises and short on spending cuts. In my opinion, a 0.6% cut in spending for 2012 is a pittance in light of overall spending. The rating downgrade could prompt our leaders to get serious about tackling the debt and deficit.
No longer is it just extreme fiscal conservatives who think it unrealistic for the U.S. government to overspend by $1 trillion each year without consequence. Standard & Poor’s is a significant player in the global economy. You may question the timing and motivation of their downgrade, but it should serve as a clarion call of the long-term risks and ramifications of our debt and deficit spending. I can only hope our politicians are listening and have the courage to do something about it.
A Double Dip Recession
Many recent economic indicators are pointing to a slowing of the U.S. economy. This has raised the speculation that we may be headed for a double dip recession.
The following definitions will help us to speak the same language:
- Recession – two successive quarters of negative economic growth as measured by GDP
- Recovery – increase in economic activity and growth in GDP following a recession
- Double Dip Recession – short period of recovery followed by another recession
As much as we may like steady economic growth, history has proven that the economy is cyclical. There are periods of economic growth and decline. There are also times of boom and bust. While there have been several recessionary periods, the last double dip was thirty years ago when the economy slowed in late 1981 after rebounding from a recession in 1980.
The most recent recession may have officially ended in the summer of 2009 as GDP stopped declining, but that doesn’t mean that all has been well with the economy for the past two years. Growth has been rather meager and sporadic, and there certainly hasn’t been any boom in economic growth to restore the trillions of dollars of wealth lost from 2007-2009.
Here are some of the recent economic statistics that make the current outlook a little bleak.
- The unemployment rate bounced back up to 9.1% in May 2011
- 54,000 new jobs were created in May, down from 232,000 in April
- Retail sales dropped 0.2% in May 2011, the first decline since June 2010; auto sales were down 2.9% for the month
- For the ninth straight week, over 400,000 people filed new claims for unemployment
- Although oil prices have declined in recent weeks, gas is still approximately $1.00/gallon more than a year ago, and continued unrest in the Middle East and the upcoming hurricane season in the U.S. could cause another spike
- Higher fuel and commodity prices are causing significant inflation in food prices
- Housing values continue to fall and an estimated 25% of all homeowners owe more on their home than its current market value
- A $14 trillion national debt and $1.4 trillion annual budget deficit make it difficult for the U.S. government to spend money to help stimulate economic growth
Time will tell if we have a double dip recession or be able to avert it. Irrespective of the economic terms of recession and recovery, the immediate economic outlook is not exceptional. Things may not get much worse, but I don’t think things are going to change all that dramatically in the near future.
I believe there are three primary factors that will continue to hinder our growth.
- Unemployment – It’s hard to have strong economic growth when 10% of the population is out of work, and another 5-10% have either given up looking for work or are underemployed.
- Housing – Aside from the fact that housing has historically been a leading contributor to economic recovery, current market values put more people at risk for default and make it difficult for people to relocate. Additionally, your house is often your largest asset, and it’s hard to have much confidence in the economy when you consider how much money you have lost and continue to lose on your investment.
- National Debt – The magnitude of the debt and annual deficits pose a substantial risk to the country and the economy. The debt is manageable because interest rates are at historic lows. A return to even moderately normal rates would place tremendous pressure on the Treasury and a rise in government interest rates will reverberate through the entire economy.
Unfortunately, there is no easy fix to any of these problems, and our political leaders have not demonstrated the ability or willingness to seriously tackle the issues. Thus, I think the best we can hope for in the near term is an economy that sputters along with relatively stagnant growth overall. The worst could be traumatic.
These are a few of my thoughts… what do you think?
U.S. Credit Rating Outlook – Is the Third Time a Charm?
You may have heard the cliché, “The third time is a charm.” When it comes to the future credit rating of the U.S. government, the cliché, “Three strikes and you’re out,” might be more applicable.
Presently, there is a lot of discussion concerning the U.S. debt limit. After borrowing $14.3 trillion, the U.S. government has reached its limit on how much money it can borrow. Accounting gimmicks and creative cash flow techniques are allowing the government to continue spending approximately $3 billion each day more than it receives in revenues. However, the U.S. Treasury is expected to exhaust these measures by early August. Unless Congress acts before then, the U.S. government will default on some of its obligations. You can read this article for a discussion on why I doubt this will happen.
A few weeks ago, two major credit ratings agencies, Moody’s Investors Services and Standard & Poor’s provided a negative outlook on U.S. debt. This doesn’t mean that they have downgraded the credit rating, but it’s an indication to investors that this is a realistic possibility in the near future.
On Wednesday, Fitch Ratings said it was putting U.S. debt on watch for a credit downgrade later this summer. This will be the third major credit ratings agency to state their concerns regarding the current debt and deficit situation of the U.S. government.
All three of the agencies have expressed doubt that the U.S. government will default on its debt. The negative outlooks reflect a general lack of confidence in the ability of Congress and the President to reach a meaningful agreement to significantly alter the current trajectory of the debt and deficit spending.
If you follow politics, you probably are not surprised by the current lack of progress and substantial political posturing. Washington frequently reaches agreement right before a deadline expires, and often enacts a temporary postponement to give itself more time. Consequently, I don’t think the ratings agencies are really surprised by the current delays. Instead, I think the negative outlook is driven by their pessimism of our political leaders to make significant changes in fiscal policy.
They realize that raising the debt ceiling is easy. It’s a simple vote Congress passed many times in recent years. The real obstacle is reaching an agreement to dramatically reduce the annual deficit, which could come via spending cuts or increasing revenue.
It’s not a charm that a third credit rating agency has a negative outlook on U.S. debt. It could be viewed positively if it motivates our political leaders to reach an agreement, but based on recent statements and reactions… don’t count on it. Instead of being a charm, I suspect the recent ratings outlook is more like another strike.
Raising the National Debt Ceiling
Within a matter of days, the U.S. Treasury is expected to hit the ceiling on its authority to borrow money on behalf of the U.S. Government. Treasury Secretary Geithner has already made plans to extend this timeframe by a couple of months. Most of it involves deferring payments and accounting gimmicks to buy the President and Congress more time.
I have no doubt that the debt ceiling will be raised. With a projected budget deficit of nearly $1.5 trillion this year, there is no way our politicians will balance the budget any time soon. Thus, the Treasury will need to continue to borrow more money to fund the government. The real issue is how much more borrowing will be allowed and what spending cuts and fiscal reforms will be enacted.
For the most part, the debate over raising the debt ceiling is political theater and brinkmanship. Sadly, it’s another example of the dysfunction in Washington. If it wasn’t so serious, it would be funny. A couple of years ago when George W. Bush was President, the Democrats resisted raising the debt ceiling and the Republicans argued that it was necessary. Now that President Obama occupies the Oval Office, it’s exactly the opposite. The Republicans are balking and the Democrats are calling them irresponsible.
Most of the Members in Congress would like to raise the debt limit by $2 trillion, which would fund the government until after the 2012 election. At the current rate of overspending, the limit would be reached shortly after the 113th Congress is seated and the President is inaugurated in 2013.
Earlier this week, Speaker Boehner said that the Republicans want to cut spending by the same amount that the debt ceiling is raised. Given the recent agreement on the 2011 budget, it’s doubtful the Republicans will come anywhere near this goal. While campaigning in 2010, the Republicans promised to cut $100 billion from the 2011 budget. The final agreement was $38 billion. Of that amount, a substantial portion included accounting gimmicks and money that wasn’t going to be spent anyway. If they couldn’t agree to cut spending by $100 million, how in the world will they ever come close to eliminating a $1.5 trillion annual budget deficit?
If you believe the U.S. Government needs some significant changes in its fiscal policy, then you must pay very close attention to what happens, and you’ll need to do some digging to get to the truth. It’s unfortunate, but you can’t take statements by our elected officials at face value. Most of what they say is political posturing and spin. Rarely do they tell the whole truth. There is often more to the story. The real truth of the $38 million of spending cuts in the latest budget deal is a prime example.
As much as I am troubled by the growing national debt, I think raising the debt ceiling is necessary. To immediately cut $1.5 trillion of spending from a $3.5 trillion budget is too much too quickly. However, it doesn’t mean that significant changes can’t be made. The President and Congress need to stop patting themselves on the back for cutting less than 1.5% of total spending. It’s a pittance in relationship to the magnitude of the problem.
Raising the debt ceiling is necessary to avoid a current crisis, and making significant cuts to the current spending and fiscal policies is needed to evade a long-term catastrophe.
