Home About Archives RSS Feed

The Independent Investor: U.S. Debt — Another Cliff Note

By Bill Schmick
iBerkshires Columnist

While politicians bicker over the "Fiscal Cliff," the government continues to borrow about $4 billion a day. The statutory ceiling on U.S. Treasury borrowing is $16.4 trillion and we will hit that number by year-end. Then what?

If Congress refuses to raise the borrowing limit, we can expect the government to run out of options to avoid a default sometime by the end of February 2013. If we default, even technically, the credit agencies are ready to downgrade our debt once again. You may remember the drama and hysterics that last year's debt limit crisis invoked.

For months, pundits predicted dire consequences if the rating of our sovereign debt was downgraded by the big three credit agencies. Foreign holders of our debt would abandon us, they said. Interest rates on all sorts of debt would skyrocket. There would be a stock and bond market crash. Standard and Poor's did actually cut our debt rating from AAA to AA-plus. Contrary to the predictions of these Cassandras, bond prices actually went higher and rates lower; so much for the vaunted power of our credit agencies.  

Readers may recall why that downgrade happened. Last year was the first time in history in which Congress turned what had been a pro forma vote to raise the debt ceiling into a hostage-taking crisis. In exchange for their approval, congressional Republicans demanded huge spending cuts. One can fault the president for going along with that game, instead of simply raising the debt ceiling on his own and dealing with the consequences.

But President Obama has made it clear that last year was a one-time event. He is insisting, as part of the Fiscal Cliff negotiations, that Congress relinquish its control over the debt ceiling. He is right, in my opinion. Using the nation's borrowing ability for political gain is unacceptable.

The 2011 debt ceiling farce also marked a turning point in a number of areas. It was the seminal event that reversed this country's priority from job creation and economic growth to austerity. It also resulted in the down grading of our nation's debt by a credit agency. It is also worth noting that S&P's downgrade decision was politically motivated.

The credit agency, in its explanation for its negative rating change, explained that based on the 2011 debt negotiations, that the U.S. government's ability to manage fiscal policy was "less stable, less effective, and less predictable."

In one of those paradoxes of history, going over the fiscal cliff would actually avert any further downgrade to our debt status. The expiring Bush tax cuts and automatic spending cuts across the board would do quite a bit to alleviate the stated default-related concerns of the credit rating agencies. The tax cuts would generate around $4 trillion in new revenues over the next decade. That is almost the exact amount most credit agencies are looking for in deficit reduction in order for our fiscal house to be out of danger.

Of course, going over the cliff and staying there will present the nation with another set of economic problems. Both sides agree that the combination of tax increases and spending cuts of that magnitude will both raise unemployment and slow the growth of the economy. It could actually tip us back into recession. One would think the risk of default for any nation would climb as a result.

Back in September, Egan-Jones, a smaller credit rating agency, downgraded American debt from AA to AA-minus, citing Federal Reserve plans to stimulate the economy (QEIII). They argued the plan would reduce the value of the dollar, do little to stimulate the economy and artificially raise the price of oil and other commodities. That would, in turn, hurt U.S. businesses and the consumer. They indicated that the risk of inflation, rather than the risk of default, was the justification for its downgrade.

In which case, if we do fail to come to a compromise, fall off the cliff and, as a result, experience a decline in economic growth and inflation, will the credit agencies actually revise their ratings upward? It would appear they would have to since the basis of their downgrades was politics and lack of fiscal austerity (S&P's reason) and inflation (Egan-Jones' argument). We will have to wait and see how this same group that missed the entire subprime debacle handles this one.

 

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

 

0 Comments
     

Support Local News

We show up at hurricanes, budget meetings, high school games, accidents, fires and community events. We show up at celebrations and tragedies and everything in between. We show up so our readers can learn about pivotal events that affect their communities and their lives.

How important is local news to you? You can support independent, unbiased journalism and help iBerkshires grow for as a little as the cost of a cup of coffee a week.

News Headlines
Pittsfield Announces First 'Citizens Academy'
Brayton Pupils Encouraged to Remember Sacrifices
Drury Announces Third Quarter Honor Roll
Williams Appoints Directors of Financial Aid, Admission
Williamstown Rotary Club Awards Paul Harris Fellowship
Darrow School Names Top Students for Class of 2018
Attorney Judith Knight Running for Berkshire District Attorney
Main Street Hospitality Appoints General Manager of Red Lion Inn
WCMA Names New Director
Memorial Day Events 2018

Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.

 

 

 



Categories:
@theMarket (259)
Independent Investor (353)
Archives:
May 2018 (7)
May 2017 (1)
April 2018 (7)
March 2018 (6)
February 2018 (7)
January 2018 (7)
December 2017 (8)
November 2017 (5)
October 2017 (5)
September 2017 (5)
July 2017 (2)
June 2017 (8)
Tags:
Retirement Markets Europe Euro Jobs Election Federal Reserve Interest Rates Housing Japan Crisis Recession Energy Currency Debt Debt Ceiling Europe Deficit Stock Market Stimulus Banks Rally Pullback Selloff Taxes Fiscal Cliff Economy Metals Oil Congress Commodities Bailout Wall Street Stocks Greece
Popular Entries:
The Independent Investor: Don't Fight the Fed
@theMarket: QE II Supports the Markets
The Independent Investor: Understanding the Foreclosure Scandal
@theMarket: Markets Are Going Higher
The Independent Investor: Does Cash Mean Currencies?
The Independent Investor: General Motors — Back to the Future
@theMarket: Economy Sputters, Stocks Stutter
The Independent Investor: Why Are Interest Rates Rising?
The Independent Investor: How Will Wall Street II Play on Main Street?
The Independent Investor: Will the Municipal Bond Massacre Continue?
Recent Entries:
@theMarket: Nothing Memorable in the Markets this Week
The Independent Investor: It Is No Longer Enough to Simply Manage Money
The Independent Investor: Are Americans Saving Enough for Retirement?
@the Market: Stocks Look Ready to Reach New Highs
The Independent Investor: What's Up With Oil?
@theMarket: China Worries Dominate Markets
The Independent Investor: Financial Scams Targeted at Elderly Are Epidemic
@theMarket: Peak Earnings Versus the Yield Curve
The Independent Investor: The Opioid Effect
@theMarket: Earnings Up; Stocks, Not So Much