Debt ceiling crisis? Who believes that! - by Daniel Calano

Daniel Calano, Prospectus, LLC

Exactly two years ago, there was a debt ceiling crisis, caused by a lot of concern and uncertainty in our country. The national debt was at about $17 trillion, and government was arguing about whether to increase the mandated ceiling. If congress didn’t agree, the U.S. would default on its debt, and there would be various ugly ramifications. The arguments seemed to be serious on both sides, and thus, the fear of a default was imaginable.

If we had not increased the ceiling, which we did, one of the biggest impacts would be defaulting on our interest payments on the debt. The holders of the debt were predominantly China and Japan with $3.4 trillion, other countries totaling $2.6 trillion, our own Federal Reserve at $2.1 trillion and the public at large, corporations, institutions, etc. with all holding small pieces comprising the balance. In other words, there would have been a lot of angry people.

I wrote about the “crisis” in the New England Real Estate Journal (http://bit.ly/1Hhhr85 ) and concluded that the crisis would be solved; that the ceiling would be raised, as there were positive signs on the horizon indicating we could afford to, and negative signs indicating we could not default. The economy was improving, unemployment decreasing, and tax revenues increasing with annual budget deficits decreasing. But it was also my conclusion it would take a very strong economy to avoid the crisis in the future.

So, it is two years later and we are facing another debt ceiling crisis. Our current debt has risen to $18.2 trillion and is projected next year to be $19.3 trillion. But what’s the reaction to today’s crisis over the debt ceiling? It seems like a big ho hum. Debt ceiling crisis, you ask? Oh, that’s just the Dems and the Republicans playing politics. Despite the political rhetoric, the public knows they have cried wolf now too many times. The belief is that they’ll get done because they’re afraid not to. Going into elections, neither side wants to be the bad guy, putting the U.S. in default for the first time.

There are also real positive events to make this a non-crisis. First, both sides seem close to a negotiated solution. The out-going speaker of the House Boehner has come up with a proposal that is acceptable to President Obama and to the moderate Republicans in Congress. The deal, which would apply to the 2016-2017 budget years, apparently would ease automatic spending cuts brought on by “sequester cuts” across the board of a few years ago. Second, there is a little more time to work on it, brought on by an unexpected influx of IRS tax revenue, which has allowed the earlier decision deadline to move from early fall to late November or December.

Most importantly, the simple fact is that the economy is improving and everybody wants to take credit, as opposed to pointing a finger at previous warnings of failure. The Federal Reserve has not moved to increase interest rates. Existing home sale pace is on track for the best year since 2007. Unemployment is below expectations, at 5.8%. Consumer confidence is O.K. GDP is up, although volatile over the last five years. And job openings continue to increase.

My last debt ceiling article ended with “stay tuned.” Some of the challenges since then have been mitigated, but some remain. Clearly, the most uncertainty is the potential for rising interest rates, which would seriously impact real estate. However, with other sectors firing on most cylinders, the net effect should continue to be positive. Apparently, our Congress tends to agree.

Daniel Calano, CRE, is the managing partner and principal of Prospectus, LLC, Cambridge, Mass.