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Debt ceiling increase brings frustration

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The argument over the United States’ debt ceiling was, by some counts, heated and confusing. Had Congress not raised the debt ceiling from its previous cap of $14.3 trillion, debts would have gone unpaid.

“Financially, it would have been horrible for our soldiers and recipients of Social Security, but most importantly, it would have been a horrible break in confidence in our government,” said Jack E. Thurman, president of BKD Wealth Advisors LLC.

At the 11th hour, Congress voted Aug. 2 to raise the debt ceiling to at least $16.4 trillion, and payments proceeded without a hiccup.

The Budget Control Act of 2011 authorizes a debt ceiling increase up to $2.4 trillion, a move that’s expected to boost the borrowing power of the Treasury.

The bill aims to reduce deficits by at least $2.1 trillion within a decade, starting next year, which will require – at least initially – discretionary spending cuts. A Joint Select Committee is charged with proposing ways to trim deficits, and the proposals are to be voted on by Dec. 23.

Adjusting the debt ceiling hasn’t come without consequences, as Standard & Poor’s downgraded the nation’s AAA credit rating – S&P’s highest – to AA-plus just days after Aug. 2 vote, creating fear in the market that a downgrade would scare buyers away from U.S. debt, leading to higher interest rates for U.S. bonds, notes and bills. And that could lead to higher interest rates for consumers.

For Thurman, what’s frustrating is that the anxiety leading up to the debt ceiling adjustment – and the market fluctuations that followed – were unnecessary, partly because the debt ceiling is arbitrary.

“It’s a self-imposed limit, and they basically are giving them their own credit limit,” Thurman said. “Kind of like if you basically own the Visa credit card company and you’d be able to set your own limit.”

The resulting downgrade, Thurman said, was probably more about concerns with the nation’s leadership than the government’s ability to pay its debts.

“It could have been prevented by the politicians,” Thurman said.

Market adjustment
As the dust settles and lawmakers get to work making the change a reality, all is not gloom and doom.

“It appears, if I’ve followed that debate accurately, that the downgrading of U.S. debt was pretty much a nonevent,” said Bill Rohlf, an economics professor at Drury University.

The stock market fluctuations that followed, Rohlf said, reflected uncertainty on how the decision would affect investors.

“We kind of wondered if people were going to continue to invest in government debt, and they have,” he added.

Thurman agreed.

“Since that downgrade, there’s been a significant purchase of (Treasury) bonds in the market. It’s pushed prices up and yields down, which is the absolute inverse of what you would expect,” he said.

Thurman noted that the economy will recover at some point, but not without strong political leadership and the willingness of U.S. citizens to rise to the challenge of making sacrifices and taking some risks.

“You’re probably not going to see the strong economy you saw four or five years ago for probably another two years,” Thurman said, pointing to 9 percent national unemployment. “Until you get those consumers back in the market buying cars, buying clothes, just buying groceries, you’re going to have an anchor in the economy. You’re just going to be pulling an anchor.”

And reabsorbing the unemployed will require politicians and business owners to work together, Thurman said.

“Washington and the business owners have to go out there and take risks … the small, (midsize) business owner is going to have to take some risks and say, ‘You know what? I’m going to expand my business, and I’m going to hire an extra person here or there,’” he added.

While cuts will be necessary, Thurman cautioned that taxes – particularly for the highest paid, will have to be re-examined.

“We’re in a quagmire of leadership,” he said. “It’s very difficult to do what the politicians are doing. It’s very difficult to make these decisions. But guess what? That’s what they’re elected to do.”

Closer to home
As the nation adjusts to a credit downgrade, ratings at the local and state levels have remained strong. In July, the city of Springfield received an improved credit rating of Aa1 from Moody’s. The city’s rating had been Aa2 since 1998.

The upgrade is an indicator that the city and the local economy are improving, said city spokesman Mike Brothers.

“This is the worst economy in 50 years and yet we’ve managed to increase our bond rating,” Brothers said.

In a letter notifying the city its rating had been upgraded, Brothers said Moody’s cited the general strength of the Springfield economy, the city government’s response approach to budgeting and the willingness to tackle the Police and Fire Pension Fund shortfall.

As a result of the upgrade, bond projects can be financed with cheaper interest rates.

“It really shows our ship is headed in the right direction on a local level,” Brothers said.

On Aug. 23, Gov. Jay Nixon announced that S&P reaffirmed Missouri’s AAA credit rating, which applies to general obligation bonds.

“We’ve maintained a tight financial discipline on spending, even as we have faced some of the worst natural disasters in our state’s history in the past year,” Nixon said in a news release.

The state’s continued highest rating will make borrowing more affordable for schools, local governments and public bodies, the release said.[[In-content Ad]]

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