Miles on Money: Welcome to the main event
Friday, January 25, 2013 7:00 AM
A staple of any circus is the sideshow – a small diversion to entertain patrons until the main event. Under the Washington “big top,” it turns out that the much-anticipated “fiscal cliff” may have been just that.
Addressing the nation’s debt without throwing the U.S. economy back into recession is no small challenge. The cliff, it seemed, was going to force our leaders to really get down to business.
Well, they did increase revenues modestly. And the Congressional Budget Office (CBO) projects that the deal will result in positive gross domestic product growth in 2013.
But the structural fiscal issues facing our nation remain. It’s even arguable whether the politicians made things better or worse. Compared with 2012 tax and spending levels, the deal decreased deficits by $600 billion to $700 billion over the next decade.
But compared with going over the cliff (i.e., higher taxes and immediate spending cuts), the legislation increased deficits a projected $4 trillion. Either way, if you hoped Congress would actually reduce our current $16.5 trillion national debt, no, that didn’t happen. According to the CBO, the national debt will rise by $3.9 trillion in 10 years.
Congress must be getting weary, because this last kick of the metaphorical can moved it forward less than 90 days. On March 27, the “continuing resolution” keeping the government running will expire, shutting down all “nonessential” government functions. On March 1, $109 billion in sequestration cuts kick in, threatening to throw the economy into recession. And, unless Congress finds a way to extend the deadline before the end of February, we are once again likely to hit the debt ceiling.
The debt ceiling fight in the summer of 2011 slowed the economy, caused turmoil in stock markets, and resulted in the downgrade of U.S. sovereign debt from “AAA” to “AA+” by Standard & Poor’s. At the time, neither Moody’s nor Fitch revised their AAA ratings, and S&P was roundly criticized for overreacting. S&P said at the time, “… we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process.”
It seems that they got it about right.
When an issuer’s creditworthiness becomes suspect, its bonds typically fall in value to reflect the added risk of default, and if it is able to issue additional debt, it normally needs to offer a higher rate of interest to attract investors. If investor confidence in U.S. Treasury securities diminishes even a little bit, it could be quite costly. In 2012, just under $8 trillion in new Treasury securities were issued. Thus a mere one percentage point increase in interest rates could raise borrowing costs nearly $80 billion a year. The roughly $65 billion in annual savings from the fiscal cliff deal looks rather diminished in this light.
Critics will rightly point out that the last time the U.S. came to the brink of default, interest on Treasury securities actually fell as investors concerned over global financial instability flocked to the relative safe haven of U.S. government debt.
But with our elected leaders apparently just as dug-in as before and no answer to continuing deficits in sight, a repeat performance is becoming a less sure bet.
On Jan. 15 Fitch noted, “In the absence of an agreed and credible medium-term deficit reduction plan …, the current Negative Outlook on the ‘AAA’ rating is likely to be resolved with a downgrade later this year even if another debt ceiling crisis is averted (emphasis added).”
The message could not be clearer: It’s time for the main event.
Let’s find a lasting solution now.
Chair and CEO of Miles Capital Inc., Website: email@example.com, Email: firstname.lastname@example.org
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