September 17, 2019

It’s the Economy: Our Debt to Society

This is the definition of a deficit, and it illustrates why the government needs to borrow money almost every day to pay its bills. Of course, all that daily borrowing adds up, and we are rapidly approaching what is called the X-Date — the day, somewhere in the next six weeks, when the government, by law, cannot borrow another penny. Congress has imposed a strict limit on how much debt the federal government can accumulate, but for nearly 90 years, it has raised the ceiling well before it was reached. But since a large number of Tea Party-aligned Republicans entered the House of Representatives, in 2011, raising that debt ceiling has become a matter of fierce debate. This summer, House Republicans have promised, in Speaker John Boehner’s words, “a whale of a fight” before they raise the debt ceiling — if they even raise it at all.

If the debt ceiling isn’t lifted again this fall, some serious financial decisions will have to be made. Perhaps the government can skimp on its foreign aid or furlough all of NASA, but eventually the big-ticket items, like Social Security and Medicare, will have to be cut. At some point, the government won’t be able to pay interest on its bonds and will enter what’s known as sovereign default, the ultimate national financial disaster achieved by countries like Zimbabwe, Ecuador and Argentina (and now Greece). In the case of the United States, though, it won’t be an isolated national crisis. If the American government can’t stand behind the dollar, the world’s benchmark currency, then the global financial system will very likely enter a new era in which there is much less trade and much less economic growth. It would be, by most accounts, the largest self-imposed financial disaster in history.

Nearly everyone involved predicts that someone will blink before this disaster occurs. Yet a small number of House Republicans (one political analyst told me it’s no more than 20) appear willing to see what happens if the debt ceiling isn’t raised — at least for a bit. This could be used as leverage to force Democrats to drastically cut government spending and eliminate President Obama’s signature health-care-reform plan. In fact, Representative Tom Price, a Georgia Republican, told me that the whole problem could be avoided if the president agreed to drastically cut spending and lower taxes. Still, it is hard to put this act of game theory into historic context. Plenty of countries — and some cities, like Detroit — have defaulted on their financial obligations, but only because their governments ran out of money to pay their bills. No wealthy country has ever voluntarily decided — in the middle of an economic recovery, no less — to default. And there’s certainly no record of that happening to the country that controls the global reserve currency.

Like many, I assumed a self-imposed U.S. debt crisis might unfold like most involuntary ones. If the debt ceiling isn’t raised by X-Day, I figured, the world’s investors would begin to see America as an unstable investment and rush to sell their Treasury bonds. The U.S. government, desperate to hold on to investment, would then raise interest rates far higher, hurtling up rates on credit cards, student loans, mortgages and corporate borrowing — which would effectively put a clamp on all trade and spending. The U.S. economy would collapse far worse than anything we’ve seen in the past several years.

Instead, Robert Auwaerter, head of bond investing for Vanguard, the world’s largest mutual-fund company, told me that the collapse might be more insidious. “You know what happens when the market gets upset?” he said. “There’s a flight to quality. Investors buy Treasury bonds. It’s a bit perverse.” In other words, if the U.S. comes within shouting distance of a default (which Auwaerter is confident won’t happen), the world’s investors — absent a safer alternative, given the recent fates of the euro and the yen — might actually buy even more Treasury bonds. Indeed, interest rates would fall and the bond markets would soar.

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Housing Market Shrugging Off Rise in Mortgage Rates

The Standard Poor’s Case-Shiller home price index on Tuesday showed a 12 percent increase in prices in 20 cities from April 2012 to April 2013, the largest gain since early 2006, when home values began to level off in advance of the market collapse. The rate of new-home sales also picked up to its quickest pace since July 2008.

The gains added to months of stronger showings in housing, a market that can infuse the economy with spending on big-ticket items like furniture and dishwashers. But the data released on Tuesday covered a period before comments last week by Ben S. Bernanke, the chairman of the Federal Reserve, caused a further jump in interest rates, raising fears that the market’s momentum could stall.

On Tuesday, many housing experts shrugged off that concern, noting that the effect of a single factor like mortgage rates would be tempered by other forces like prices, wages and changes in employment. Moreover, any rise in interest rates could cut both ways, with some potential buyers encouraged to try to make a deal sooner to get ahead of further increases.

For now, though, the biggest factor in the market, real estate agents say, is a low number of homes for sale, and that did not change after the Fed’s announcement.

“For our low-$100,000 buyer, it’s almost impossible to find a house right now,” said Renae Jackson, an agent in Houston, recounting a flurry of bidding wars. She acknowledged that if mortgage rates increased too much it would cause a pullback, but said she believed “whoever it is” that controls interest rates would be cautious.

“I don’t think they’re going to take it that high that fast — they don’t want to see the economy crash again,” she said.

Mortgage rates are not specifically under the control of the Federal Reserve, and they are subject to a wide variety of market forces. But they remain near historical lows and home prices are still well below their peaks in most markets, meaning that housing is still relatively affordable for many Americans. Stuart A. Miller, the chief executive of the Lennar Corporation, one of the country’s top home builders, credited recent gains to an improving economy, pent-up demand and a severe housing shortage after so little was built during the recession.

“Inventories are low for both new and existing homes, as well as for rentals,” said Mr. Miller, whose company reported a 53 percent rise in revenue in the second quarter compared with the same period a year earlier. “The monthly payment math continues to push families to find a way to purchase.”

Home values are 11.7 percent below their peak in the mid-2000s, according to a home price report by the Federal Housing Finance Agency that tracks mortgages, and more than 25 percent below their peak according to Case-Shiller, which includes all-cash purchases in its calculations. If mortgage rates rise to 4 percent by the end of the year, as the Mortgage Bankers Association forecasts, they will still be much lower than the rates most Americans have experienced over the last few decades. In May, the average interest rate on a 30-year fixed mortgage stood at 3.5 percent.

For budget-conscious buyers, a return to a more historically normal 6 percent interest rate would make a significant difference. The monthly payment on a $300,000 mortgage would be about $460 more at 6 percent than at 3.5 percent. But such buyers could still turn to alternatives like adjustable-rate mortgages.

Leah Berk, a business school student who is searching for a condo in the popular Boston-area town of Brookline, said she was much more concerned about finding the right property than about rising mortgage rates.

“I’m really at the beginning of my search, so I’m not looking at the interest rates super-duper carefully,” she said. “My parents, when they bought their house 30 years ago, the interest rates were 17 percent. So with that in mind, if I can get an interest rate that’s 4 or 4.5 percent, that’s fine.”

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As California Bounces Back, Governor Calls For Lofty Goals

Grasping at California’s vision of itself as a land of opportunity and a model for the rest of the nation, Mr. Brown said the state was rebounding financially after a difficult period. In a speech citing sources as varied as the Bible, Montaigne and Yeats, Mr. Brown said the state’s budget was now sound, but he also warned of profligacy, a remark that seemed directed at the Democratic lawmakers listening to him in the State Capitol here.

“The message this year is clear: California has once again confounded our critics. We have wrought in just two years a solid and enduring budget,” Mr. Brown, a Democrat, said in his third State of the State address since returning to office in 2011. “Against those who take pleasure, singing of our demise, California did the impossible.”

Mr. Brown spoke of wanting to reform school financing by empowering local school districts, and of continuing to lead efforts to fight climate change, like the cap-and-trade system for carbon emissions that went into effect recently.

Recalling the big infrastructure projects in the state’s past, Mr. Brown also voiced strong support for two big-ticket items that have drawn strong opposition: a bullet train that would eventually link Los Angeles and the Bay Area, and two tunnels that would funnel water directly from Northern California to more populated areas in the south.

“The London Olympics lasted a short while and cost $14 billion, about the same cost as this project,” he said of the tunnels. “But this project will serve California for hundreds of years.”

Mr. Brown’s speech came at what many are describing as a turning point for California after years of economic turmoil. The state’s economy is continuing to show signs of strengthening, with job growth and a housing market revival.

Fiscally, after years of ballooning budget deficits, the state is now projecting a balanced budget. In November, Mr. Brown surprised many by winning a hard-fought campaign to pass Proposition 30, a temporary tax surcharge that will pour $6 billion a year into the state treasury for the next seven years.

Still, Mr. Brown has repeatedly warned about the need to control spending. With Democrats now having supermajorities in the Senate and the Assembly, they can pass tax increases unilaterally. As experts predict that Democratic legislators will face pressure to increase spending, many are now describing Mr. Brown, long known as “Governor Moonbeam” for his eccentricities, as the only adult in the room.

Citing the story of Genesis and Pharaoh’s dream of seven cows, he said: “The people have given us seven years of extra taxes. Let us follow the wisdom of Joseph, pay down our debts and store up reserves against the leaner times that will surely come.”

In interviews, Mr. Brown, who served two terms as governor from 1975 to 1983, has brushed aside talk of his legacy. But in recent months, Mr. Brown, 74, who was treated recently for prostate cancer, has spoken about his mortality, mentioning the death of a close friend.

“This is my 11th year in the job, and I have never been more excited,” he said.

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Bucks: The Best Deal You Ever Got, Just by Asking

Thierry Roge/Reuters

Many personal finance experts will tell you they subscribe to the belief that everything is negotiable. It certainly doesn’t hurt to ask, at least.

This tactic can often result in small savings, for things like utilities or gym memberships, as we’ve discussed on Bucks before. Many people are successful in negotiating rent, prices of cars and other big-ticket items.

But it can pay off to ask for discounts and deals in other places.

During one of several visits to our bank branch when we were in the process of renting a new apartment, I discovered that my husband had been paying for cashier’s checks while I have not, even though we have
the same account there. When he is asked to pay the $8 fee, he pays it. I ask for it to be waived, and I’ve never been refused.

Sometimes the amounts are trivial, but a good talker can score significant savings in circumstances where prices appear to be fixed. A kind professor once secured tuition for me for a full semester of graduate school, after nothing more than a casual conversation.

Do you ever ask for deals in unconventional places? Have you ever gotten something for free or at a tremendous discount just by asking for it?

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