Friday, July 29, 2011

Debt Ceiling delight

“We all think we’re going to get out of debt.”
-Louie Anderson (comedian)

European debt. Greek debt. Italian debt. Irish debt. Portuguese debt. Spanish debt. And of course, good ol’ USA debt. Debt, debt, debt. One can’t turn on the tv or check for news on the web without being pummeled about the world’s debts. The stock market gets whipsawed whenever government debts bubble up to headline level. Yes, it’s bad. The public debt loads of many industrialized countries already exceed 100% of their economies’ GDP (Gross Domestic Product) – Japan is at something like 220%, Italy’s at 120%, here in the US it’s 60-80%, depending on whom you ask. The greater problem of course, is not the debt level itself, but the rate at which it is growing. Pretty soon, Uncle Sam will be getting a cash advance on his Visa to make the payment on his MasterCard. If you’ve ever seen this happen to someone you know the end result is not pretty.

I’d like to believe that our elected representatives are not dumb enough to ride their “principles” over the Cliffs of Default, but we’re in uncharted territory with 25% of the House Republicans having signed up as members of the Tea Party Caucus. The bottom line effect of default would be much higher interest rates paid by the government on future borrowing. Not to mention the severe haircuts on the value of existing bonds. These higher rates would have a ripple effect through the US economy and impact all economic activity: higher mortgage rates, higher auto loan rates, higher credit card rates, higher business loan rates and on and on. Forcing default for the sake of “principles” is a bad idea and I hope cooler heads prevail.

Inflation Watch

The price of oil has dropped significantly since last quarter and currently hovers around $97 per barrel for West Texas Intermediate (WTI). The price of gas at the pump has come down quite a ways as well. The Federal Reserve continues to hold their overnight rate at near 0. Inflation is creeping up though – the “all items” CPI for the 12 months ending June 30 was +3.6% - expect to see price increases at the grocery store.