Think Breaching the Debt Ceiling Won't Affect You? Think again.

 If Congress fails to increase the government’s borrowing limit in time, the result would be a shock to the economy and financial markets.

Writing for The New York Times, Alan Rappeport, Jim Tankersley and Jeanna Smialek explain why breaching the debt ceiling would be very bad for our economy and for individuals. 

"For years, Republicans have sought to tie spending cuts or other concessions from Democrats to their votes to lift the borrowing cap, even if it means eroding the world’s faith that the United States will always pay its bills. Now, back in control of a chamber of Congress, Republicans are poised once again to leverage the debt limit to make fiscal demands of President Biden."

Rather than revising our outdated, flawed income tax system so that higher income earners would pay their fair share of taxes, Republicans would rather cut Medicare, Social Security, and other programs for low and moderate income families. Keep in mind that we are talking about paying debts already incurred by previous Congresses. The last round of Republican income tax cuts for the wealthy exacerbated the debt problem. Republicans more than Democrats are responsible for increasing the federal deficit with their tax cuts for the wealthy.

What is likely to happen if there is not agreement to raise the debt ceiling? The following would occur: "a shutdown of basic government functions, a hobbled public health system, and a deep and painful financial crisis." Remember the last time the government shut down because Republican refused to raise the debt ceiling? 

"The debt limit is a cap on the total amount of money that the federal government is authorized to borrow to fulfill its financial obligations." Note: financial obligations incurred by previous Congressional decisions.

"Just approaching a breach of the debt limit can hurt the economy. In 2011, congressional Republicans and President Barack Obama engaged in a standoff over spending and debt that was resolved just in time to avoid hitting the limit. That brinkmanship rattled investors, consumers and business owners, with concrete consequences."

• Stock prices plunged and didn't recover for 6 months.
  
• volatility in the market spiked . 
• The cost of borrowing for businesses jumped making it more expensive to borrow to grow. 
• Mortgage rates spiked putting a lid on home buying. 
• The credit agency S&P downgraded America’s credit rating for the first time.

Failing to pay our national obligations would "add drastically to the government’s interest payments, which the White House projects will cost the equivalent of 2.6 percent of the total American economy over the next decade, further squeezing the federal budget. It would also threaten to destabilize bond markets globally because U.S. Treasury bonds are largely seen as one of the safest investments in the world."

Let's not do this again. 

AAA rating of the United States government bonds at risk due to politics

"Fitch Ratings, a credit rating company, is considering downgrading the AAA rating of the United States government bonds. The problem is not the economy. In fact, the Fitch Ratings report praises the economy, saying it “has recovered much more rapidly than expected, helped by policy stimulus and the roll-out of the vaccination program, which has allowed economic reopening…. [T]he scale and speed of the policy response [is] a positive reflection on the macroeconomic policy framework. Real economic output has overtaken its pre-pandemic level and is on track to exceed pre-pandemic projections....” 

"Although the report worries about the growing debt, we also learned yesterday that the deficit for June dropped a whopping 80% from the deficit a year ago, as tax receipts recover along with the economy. Year-to-date, the annual deficit is down 18% from last year."

"The problem, the report says, is politics. And it is specific." “The failure of the former president to concede the election and the events surrounding the certification of the results of the presidential election in Congress in January, have no recent parallels in other very highly rated sovereigns. The redrafting of election laws in some states could weaken the political system, increasing divergence between votes cast and party representation. These developments underline an ongoing risk of lack of bipartisanship and difficulty in formulating policy and passing laws in Congress.”

Thanks to Boston College historian Heather Cox Richardson for this blog post. 

CEO median compensation reaches $13.7 million

 For heads of the 300 largest companies, CEO compensation surged to $13.7 million (up from $12.8 last year) in 2020 when the rest of the nation was suffering dramatic financial losses, according to The Wall Street Journal (4/12/21). Just one more example of the growing gulf between the top earners and the rest of us. 

for example, Norwegian Cruise Line's CEO Frank Del Rio doubled his pay to $36.4 million during the same year (2020) that the company lost $4 billion after cruises were cancelled and revenue's plummeted 80%. How does that make any sense?

Trump tax cuts are a sugar high for the economy

Consider this as you prepare your federal income taxes for 2019: While the Republicans promised the 2017 tax cuts would pay for themselves, they have simply increased the federal deficit to unsustainable levels.

"During his 2016 campaign, President trump talked about paying off the federal debt within 8 years. Reality and the policies that he has enacted have moved in the opposite direction."  (Richard Rubin writing in The Wall Street Journal, 1/29/20).

The US budget deficit is expected to reach $1.02 trillion this year as government spending continues to outstrip tax collection, according to the Congressional Budget Office. At this rate, the US federal debt is on track to reach $31.4 trillion, or 98% of national GDP, by the end of 2030, the CBO said.

"A combination of the 2017 tax cuts and a surge in new spending has pushed the deficit wider. This year would mark the first time since 2012 that the deficit breached $1 trillion, a threshold that has alarmed some budget experts because deficits typically contract — not expand — during periods of sustained economic growth" writes Jeff Stein in The Washington Post. "The deficit in 2016, President Barack Obama’s last full year in office, was $585 billion."

"The CBO projection also appears to cast doubt on recent statements by President Trump and other administration officials that the 2017 Republican tax cut is creating enough revenue through new economic growth that it will offset all near-term losses."

https://www.washingtonpost.com/business/2020/01/28/us-deficit-eclipse-1-trillion-2020-cbo-says-fiscal-imbalance-continues-widen/?wpisrc=nl_sb_smartbrief

US Budget Deficit sets record... again AND job creation lowest since 2011

The US budget deficit reached $1.02 trillion in 2019, according to the Treasury Department. This marks the first time the deficit has topped $1 trillion since 2012.
Thanks in part to Trump's tax cuts we are leaving the next generation with an astronomical deficit.
https://edition.cnn.com/2020/01/13/politics/us-budget-deficit-2020/index.html

And: The US economy created jobs last year at the slowest pace since 2011, according to the Labor Department. Job creation averaged 175,000 monthly in 2019, compared with 225,000 in 2018.
https://www.afp.com/en/news/3954/us-job-creation-2019-slowest-8-years-doc-1nl75p3

Tax cuts imperil US economy, Fed's Dudley says

So you're looking forward to a meager cut in your federal income taxes in the coming few years. Please realize that means cuts in government spending which may affect you. Further, states will have to raise taxes or cut programs as a result.
A serious challenge to the Republican's tax legislation comes from the head of the Federal Reserve Bank of New York. 
"The US tax law puts the economy on an unsustainable fiscal path and endangers stability, Federal Reserve Bank of New York President William Dudley said." (Retirement Security Smartbrief)  "In the long run, ignoring the budget math risks driving up longer-term interest rates, crowding out private-sector investment and diminishing the country's creditworthiness," he said.
As quoted by Michael S. Derby in The Wall Street Journal:
"Mr. Dudley noted concern over the impact of the tax overhaul, whose Republican authors believe will unleash stronger economic growth and higher wages. Mr. Dudley warned that the tax law is likely to drive the deficit up over time."
“The current fiscal path is unsustainable,” Mr. Dudley said. “In the long run, ignoring the budget math risks driving up longer-term interest rates, crowding out private-sector investment and diminishing the country’s creditworthiness.”

Why did God create economists? To make weather forecasters look good.

"The joke’s an old one, but it’s been given new life after the chief economist of the Bank of England—among the most important jobs in the profession—compared economics to one of the biggest forecasting failures of weather people."
"Andy Haldane is optimistic that, like meteorology after its fiasco, applying more data and advanced computing can help economic forecasting recover from its failure to predict the 2007-9 financial crisis."
"He shouldn’t be. The problem isn’t that forecasting the weather and forecasting economics are different (though they are, in important ways I’ll come back to). The problem is that they’re very similar, both trying to predict complex systems that can be tipped from one state to another by very small changes," writes James Mackintosh in The Wall Street Journal (1/9/17). He continues: "History suggests investors should put little trust in" economic forecasts and the upcoming year promises to be one of the most unpredictable ever with the new administration. So take any economic forecasts with a grain of salt and focus investment decisions on long run, fundamental principles espoused in this blog. 

No ‘New Normal’ Economy

“Are the latest swings in the economic and financial headlines making you wonder when it will ever stop?” financial writer Jason Zweig asks.

“The short answer is: It will never stop. And what’s been happening isn’t “the new normal”; it’s just the old normal playing out before a new audience.” So get used to the volatility, save and invest more and hold a diversified portfolio. Maybe this article will help put the violent swings in the economy in perspective... or maybe not. But one must admit that the first decade of the 21st century has been a real test of investors' risk tolerance.

Jason Zeweig is one of my favorite financial writers.

Read more at: http://www.advisorone.com/2011/12/06/jason-zweig-there-is-no-new-normal-economy

Ruminations on Gift Cards

After reading numerous articles about the pitfalls of gift cards and the estimated $1.9 billion (yes, that’s a b) that are never redeemed, I can't help but wonder why people don't just give cash (or even checks).

It is critical to teach children to save and you'll teach them the exact opposite message by giving a gift card. With cash (or equivalent) parents can encourage their children to save some and even set some money aside for donations. One lament I hear from women is how they wish their children would learn better financial behaviors. Think about what lessons you are teaching your children this holiday season (and I don’t mean just about gift cards).

Secondly, in today's economy many adults need money to pay the rent, mortgage, or utility bill, although it may not be obvious and they may be trying to hide their situation. I guess I'm conservative and old fashioned but I view gift cards as simply a very effective marketing strategy to encourage Americans to spend more than is prudent.