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Archive for the ‘Debt Ceiling’ Category

Long-Term Downgrade for a Short-Term “Problem”?

In Debt Ceiling, Economy, Federal Deficit, Standard & Poor's USA Downgrade on August 9, 2011 at 11:56 pm

Eugene Robinson happens to be one of my favorite liberal columnists because he writes with flair and tends to be ideologically consistent.  Whereas many writers are predictably partisan hacks, Mr. Robinson is willing to take on President Obama and the Democrat Party when he believes they are wrong. 

I take exception, however, with two points in today’s column. [1]   

Mr. Robinson says the downgrade has Republican “footprints” because he thinks S&P is afraid the GOP will force a default.  He says, “This isn’t the rationale that S&P gave, but it’s the only one that makes sense”.  Many on the Left are trying to blame the downgrade not on the party in power but on Republicans (see: https://econscius.wordpress.com/2011/08/07/jay-carneys-4-trillion-lie/).  Never mind S&P’s own words about the growing debt or their repeated warnings in recent years, warnings issued before there even was a Tea Party (see https://econscius.wordpress.com/2011/07/28/us-aaa-credit-rating-downgrade-was-expected/).

If Mr. Robinson believes S&P based – or should have based – its decision not on the growing US debt but on a near-term Republican “threat” to default, then why downgrade the long-term debt to “AA+” and keep the short-term debt at “AAA”?  Isn’t it the shorter term debt supposedly at risk of Eric Cantor?  Why worry about the 30 year T-bond and not the one year T-bill?  Mr. Robinson quotes S&P, “A new political consensus might (or might not) emerge after the 2012 elections.”  True; so why worry more about who will be in Congress 20 or 30 years from now?  

We do not know how fast the deficit will grow; we might bump up against the Debt Ceiling faster than expected, possibly before the 2012 elections if the economy dips into another recession.  Many financial commentators are predicting a new recession. [2] [3]   S&P specifically says, “we believe [the Debt Ceiling] act provides sufficient clarity to allow us to evaluate the likely course of US fiscal policy for the next few years.” [4]   The short-term “AAA” rating was affirmed even with John Boehner on the loose in the Capitol?  Wow.

Secondly, Mr. Robinson disputes the merit of any downgrade, saying:

“There is no plausible scenario under which the United States would be unable to service its debt. If political gridlock were to persist, our government would be able to pay bondholders with a combination of tax revenues and funds raised by selling more Treasury bills. And in the final analysis, as Alan Greenspan noted Sunday on “Meet the Press,” the United States “can pay any debt it has because we can always print money to do that.” [1]

Yes, it is true the US can pay bonds out of current tax receipts or just “print money”. [5]  But there is a massive risk to printing money.  Firing up the government printing press debases the currency a la Weimar Germany.  

Running the printing press would be a short-term solution.  US government debt is a series of hundreds of outstanding debt issues.  Approximately every week, a series of Treasury debt matures and needs to be replaced with a new issue.  Treasury bills mature in less than one year. [6]  As of 7/31/11, the public held $1.5 Trillion of T-bills. [7]  All mature in the next 12 months and needs to be rolled over into new Treasury debts.  Other, older series of Treasury notes and long-term Treasury bonds mature regularly throughout each year, too.  For example, 30 year Treasury bonds issued in fall 1981 mature in coming months. 

If the US government decided to inflate away debt obligations by printing money, the US Dollar would decline in value.   That would lose investor confidence.  This would precipitate a crisis:  investors would soon enough refuse to buy new issues of Treasury debt at anything like current low rates, if at all.  Imagine yourself as China, lending to the US in the expectation of receiving US Dollars for your debt upon maturity.  If your interest and principal started being paid with rapidly depreciating Dollars created out of thin air, would you want to keep lending?  You’d demand higher interest rates, if you lent at all.  Alternatively, you might be willing to lend, but only in bonds denominated in Chinese Yuan.  You know the US government cannot inflate the Yuan, because the US printing press cannot print Yuan.  Amusing as it would be, I cannot picture Timothy Geithner changing out the US Mint’s printing blocks with Chinese characters.

Running the printing press is not a feasible bond payment option. 

[1] http://www.realclearpolitics.com/articles/2011/08/09/a_downgrades_gop_fingerprints_110861.html

[2] http://www.marketwatch.com/story/get-ready-for-great-recession-20-2011-08-08?link=home_carousel

[3] http://www.marketwatch.com/story/how-to-brace-your-portfolio-for-another-recession-2011-08-05?link=kiosk

[4] http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3DUS_Downgraded_AA%2B.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1243942957443&blobheadervalue3=UTF-8

[5] Note that Mr. Robinson is actually stating one reason a “default” was unlikely no matter what happened in the recent Debt Ceiling controversy:  the government could have paid bond interest first out of tax revenues.  

[6] T-bills mature in less than one year.  Notes mature in 1-10 years and T-bonds mature in more than 10 years.

[7] http://www.treasurydirect.gov/govt/reports/pd/mspd/2011/opds072011.pdf

Picture from Wikipedia commons.

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Jay Carney’s $4 Trillion Lie

In Debt Ceiling, Federal Deficit, Government Spending, Obama Administration, Political Rhetoric on August 7, 2011 at 1:20 am

Presidential Press Secretaries are paid to, shall we say, spin.  Sometimes, spin crosses the line to outright falsehood.  Let’s call a spade a spade:  Jay Carney lied Saturday:

“Over the past weeks and months the President repeatedly called for substantial deficit reduction through both long-term entitlement changes and revenues through tax reform, with additional measures to spark jobs and strengthen our recovery,” press secretary Jay Carney said in a statement. “That is why the President pushed for a grand bargain that would include all of these elements and require compromise and cooperation from all sides.” [1]

Mr. Carney must hope you weren’t paying attention to Debt Ceiling negotiations.  Just a few months ago, Mr. Carney said it is “imperative” that a debt-limit vote not be “held hostage to any other action.” [2]  As reported in April in TheHill.com, “Carney maintained that a hike to the debt ceiling and ongoing efforts to rein in the deficit are both necessary, but not connected. [emphasis added]  “These are both urgent, but they’re not linked.” [emphasis added] [2]

Back in April, it was not just Carney but Jack Lew, the director of the Office of Management and Budget, who said there was no linkage.  Mr. Lew said: “Our very strong view is that the debt limit should be passed as a clean, standalone bill.” [2]

So which was it?  The Debt Ceiling and debt reduction were to be linked or were they not linked?

The fact is the Obama Administration wanted carte blanche to raise the Debt Ceiling without even a dime of deficit reduction.  Democrats and liberal opinion writers pilloried the GOP for months for the Tea Party approach of cutting the deficit in exchange for raising the debt limit.  We were told over and over again how it was unreasonably “taking hostage” the process.  It was also pointed out this was new and unprecedented because in the past, Congresses of either party had always granted “clean” Debt Ceiling increases. 

Only when the Republican caucus appeared to be united about blocking a Debt Ceiling increase and polls showed the public was supportive of the approach of cutting spending or cutting spending/raising taxes [3] did the Administration change its tune from “do nothing” to the “grand bargain” approach.  Going further back, the President had also ignored last year’s recommendations of his Deficit Reduction Committee.

The actual timing of the “grand bargain” was around July 7, three weeks before the Debt Ceiling Deal, when it was reported by Reuters, “Obama and congressional leaders are aiming for at least $3 trillion and possibly more than $4 trillion in budget savings.” [4]  It was not something President Obama had been pushing for “months”.

For Carney to try to ignore history and pretend a $4 trillion deficit reduction Debt Ceiling deal always was Obama’s position and it was the Republicans who wanted a smaller $2 billion in cuts is a blatant distortion.  It is also unfair to claim the GOP was fully responsible a larger $4 trillion deal did not happen as it takes two sides to negotiate.  The Administration does not want to be blamed for S&P’s rating downgrade to the United States, so it is rewriting history. 

 

 

[1] http://thehill.com/homenews/administration/175763-white-house-sap-downgrade-is-why-obama-pushed-for-grand-bargain

[2] “White House officials maintained Friday that the administration wants to see a “clean” increase to the federal debt limit” in http://thehill.com/blogs/on-the-money/budget/156425-white-house-maintains-call-for-clean-debt-ceiling-hike-despite-obama-comments

 [3] http://www.gallup.com/poll/148472/Deficit-Americans-Prefer-Spending-Cuts-Open-Tax-Hikes.aspx

[4] http://www.reuters.com/article/2011/07/07/us-usa-debt-idUSTRE7646S620110707

Good News: No Constitutional Crisis!

In Debt Ceiling, Obama Administration on August 3, 2011 at 7:49 am

In all the punditry about the Debt Ceiling deal becoming law today, one aspect has hardly been commented on.  It is fortunate a Constitutional crisis has been averted!

Some Democrats and liberal writers were recommending President Obama ignore the Debt Ceiling, if a deal was not completed in time, and go ahead with fresh issuance of Treasuries by invoking the 14th Amendment. [1] [2] [3]  What the  14th amendment, Section 4, says (emphasis added):

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.”

The non-partisan Congressional research Service found the 14th Amendment would not allow circumventing the Debt Ceiling. [4]   I am not a lawyer, but my read is the 14th Amendment simply states the public debt of the United States must be honored.   That would mean, in the event the Debt Ceiling was reached, the US Treasury must have paid the maturing public debts in preference before other government payments (e.g. Federal payroll, Social Security, payments to government suppliers, etc.).  The US government collects about $2 trillion in annual revenues and that money would need to go first to paying bondholders.  There is nothing in the amendment’s language suggesting the Executive Branch would have the power to ignore the Congressionally set borrowing limits by issuing new debt above the Debt Ceiling limit.  Absent a Debt Ceiling increase, the government would simply have to pay its debts first, before paying anyone else. 

If no Debt ceiling agreement had been reached and the President had gone ahead and ignored the Debt Ceiling law, it would have been a new and forceful exertion of executive power vis-a-vis the legislature.  The US Congress has always approved the nation’s borrowing.  Loans were individually approved by Congress (e.g. the Panama Canal loan) until WWI, when the borrowing became so frequent that Congress devised the Debt Ceiling to ease the common issuance of debt.  Congress has raised the Debt Ceiling many times hence. 

If the President had unilaterally ignored the Debt Ceiling through the dubious use of the 14th Amendment, it likely would have ended with Articles of Impeachment, court cases and appeals.  It is always possible the Supreme Court could find in favor of the President using the 14th Amendment to bypass Congress and borrow at will.  An Impeachment would be  racially divisive as well as a major national trauma.  Those of us skeptical of executive power have to be pleased a Constitutional Crisis was averted.

[1] http://thehill.com/blogs/blog-briefing-room/news/174321-sen-harkin-nothing-prevents-obama-from-using-14th-amendment

[2] http://thehill.com/homenews/house/174553-congressional-black-caucus-urges-14th-amendment-debt-limit-fix

[3] http://www.politico.com/news/stories/0711/60038.html

[4] http://www.washingtontimes.com/blog/inside-politics/2011/jul/13/crs-obama-14th-amendment-circumvent-debt-limit/

The USA Has Defaulted Before

In Debt Ceiling on August 1, 2011 at 12:07 am

JimmyCarterPortrait.jpg

The Debt Ceiling controversy has taught many of us new things about the Public Debt and Econscius is no exception.  I had heard many times the US has never defaulted.  “No default” has been repeated enough to be accepted as fact.  For example, in January, the former chairman of the president’s Council of Economic Advisers, Austan Goolsbee, said “If we hit the debt ceiling, that’s essentially defaulting on our obligations, which is totally unprecedented in American history” [1] and Treasury Secretary Geithner said, “no responsible leader would say the United States of America, for the first time in its history, should not pay its bills, meet its obligations.” [2]

It turns out the US has defaulted three times, most recently in 1979.

In 1790, the young United States defaulted on its external and domestic debt obligations. [1]  

In 1933, President Roosevelt and his Congress repudiated the specific clause in debt contracts that investors may request their payment be made in gold. [3]

In April 1979, there was a default during the Carter Administration after a dispute over raising the Debt Ceiling with, ironically, a Democratic Congress. [4] [5]  Brady Dennis in the Washington Post wrote:

“There was one short-lived incident in the spring of 1979 that offers a glimpse of some of the problems and costs that might arise if the stalemate on Capitol Hill continues.  Then, as now, Congress had been playing a game of chicken with the debt limit, raising it to $830 billion – compared with today’s $14.3 trillion – only after Treasury Secretary W. Michael Blumenthal warned that the country was hours away from the first default in its history.”

“That last-minute approval, combined with a flood of investor demand for Treasury bills and a series of technical glitches in processing the backlog of paperwork, resulted in thousands of late payments to holders of Treasury bills that were maturing that April and May.” [6]

 Donald Marron of Forbes described:

“Investors in T-bills maturing April 26, 1979 were told that the U.S. Treasury could not make its payments on maturing securities to individual investors. The Treasury was also late in redeeming T-bills which become due on May 3 and May 10, 1979. The Treasury blamed this delay on an unprecedented volume of participation by small investors, on failure of Congress to act in a timely fashion on the debt ceiling legislation in April, and on an unanticipated failure of word processing equipment used to prepare check schedules.” [7]

This may sound like a technical default, which it was, but so is the potential default looming today. 

There are some lessons here: (1) a last-minute deal could potentially lead to a technical default because  of the possibility of back-room clerical mistakes like the Treasury Department made in 1979, (2) just because something is repeated as fact (‘the US has never defaulted’) does not mean it is true, and (3) in 1979, there was a 60 basis point (0.60%) increase in interest rates and higher rates persisted even after the technical default was cured. [7]   We cannot afford to pay any extra interest on our massive Public Debt, which argues for both sides compromising enough to get a deal.  Fortunately, as of this writing, a deal appears to be in reach.

[1] http://economix.blogs.nytimes.com/2011/01/04/fearing-another-u-s-debt-default/

[2] http://www.washingtonpost.com/business/economy/delayed-payments-in-1979-offer-glimpse-of-default-consequences/2011/07/10/gIQARRBj7H_story.html?hpid=z1

[3]  Alex J. Pollock describes it here: http://spectator.org/archives/2009/01/21/was-there-ever-a-default-on-us/.

[4] http://www.bloomberg.com/news/2011-07-29/defaulting-like-it-s-1979-the-ticker.html

[5] http://blogs.wsj.com/marketbeat/2011/07/25/1979-the-last-time-we-defaulted/

[6] http://www.washingtonpost.com/business/economy/delayed-payments-in-1979-offer-glimpse-of-default-consequences/2011/07/10/gIQARRBj7H_story.html?hpid=z1

[7] http://blogs.forbes.com/beltway/2011/05/26/the-day-the-united-states-defaulted-on-treasury-bills/

US “AAA” Credit Rating Downgrade Was Expected

In Debt Ceiling, Economy, Federal Deficit on July 28, 2011 at 4:32 am

Go to fullsize image

We cannot say we were not forewarned about a possible drop in the S&P rating for sovereign debt of the United States from the gold standard of “AAA”.   Back in April 2011, S&P cut its outlook on US debt from “stable” to “negative” on account of the mounting deficit.

I think the current political battle over raising the Debt Ceiling will end with an eleventh hour deal but the Federal Government’s credit rating may be cut, anyway, even with a deal that avoids a default.  Mr. Deven Sharma, president of Standard & Poor’s, told a US House subcommittee the US would need to work out a deficit reduction package of about $4 trillion over the next decade for the nation to keep its “AAA” rating. [1]  The Boehner and Reid deals now on the table fall well short of $4 trillion and President Obama’s original request was for a Debt Ceiling increase with no deficit reduction at all.

If the rating is dropped from “AAA”, there will be much partisan blame over who caused it.  The good news is a drop to “AA+” is hardly a high risk rating, putting the USA at the same rating as Belgium.  There will be short-term portfolio churn as some pensions and money market funds require holdings to be “AAA”.  Other buyers are likely to step up for US debt, though probably at slightly higher yields.  Nevertheless, the blow to American prestige will be enormous. 

Do not blame the ratings agencies who are simply messengers of the bad news.  The fact is a ratings downgrade becomes inevitable when servicing the debt becomes more risky.

Do not let politicians mislead you into thinking a ratings downgrade unexpectedly popped up out of nowhere.  We have been warned many times the past three years as seen in this sample of headlines:

“S&P says pressure building on U.S. “AAA” rating,” Reuters, Sept. 17, 2008 [2]

“Moody’s Says U.S. Debt Could Test Triple-A Rating”, New York Times, March 16, 2010 [3]

“Moody’s and S&P Alert US About Credit Rating”, New York Times, January 14, 2011 [4]

“U.S. Warned on Debt Load: S&P Signals Top Credit Rating Is In Danger, Stoking Political Battle on Deficit”, Wall Street Journal, April 17, 2011 [5]

“Analysis – United States gets closer to losing its AAA rating”, Reuters, July 25, 2011 [6]

May we be forewarned about what may happen in the future.  There are many notches below “AA+” a profligate United States may gradually be cut to.  Most ominous is how continuous growth in the deficit relative to GDP exposes the US to higher interest rates whenever the rate environment turns up.  The deficit then grows as the debt used to pay that interest is added onto old debt.  A 3% increase in average interest costs on a $15 trillion debt amounts to $0.45 trillion in new interest expense each year.  Most 30-year bonds will not adjust any time soon, but short-term T-bills roll over every month, reseting to the latest interest rates.  

 

[1] http://www.csmonitor.com/Business/2011/0727/US-debt-downgrade-is-possible-not-inevitable

[2] http://www.reuters.com/article/2008/09/17/us-usa-rating-sandp-idUKN1752966920080917

[3] http://www.nytimes.com/2010/03/16/business/global/16rating.html?adxnnl=1&ref=moodyscorporation&adxnnlx=1311824019-0Pn17TP47seMxuN11WzntQ

[4] http://www.nytimes.com/2011/01/14/business/economy/14place.html?_r=1&ref=standardandpoors which refers to Moody’s report: http://graphics8.nytimes.com/packages/pdf/business/AaaSovereignMonitor-January2011.pdf

[5] http://online.wsj.com/article/SB10001424052748704004004576270693061767996.html

[6]  http://uk.reuters.com/article/2011/07/25/uk-usa-debt-downgrades-idUKTRE76O0DE20110725

No Ceiling On The Errors of Andrew Sullivan

In Debt Ceiling, Economy, Federal Deficit, Obama Administration on July 23, 2011 at 4:36 am

The Daily Beast’s Andrew Sullivan new article contains many inaccuracies.  Let us count the errors!

(1) Sullivan says “the GOP is fundamentally the party of the Confederacy”. [1]  This is an obvious factual error if meant in a literal historic sense.  Presumably, Sullivan means this as a racist smear.  Today’s GOP is strong in many Southern states, but is also successful in many “Union” Midwest states, the Mountain West, in abolitionist New Hampshire, and in the suburban areas of the big cities of the old Union states.  I have never met a Republican advocating slavery. 

Does Sullivan mean those politicians who win in former Confederate states are illegitimate?  If so, does he also consider President Obama to also be a “Confederate” because he won Virginia, North Carolina and Florida?  Is DNC Chair Debbie Wasserman-Schultz (D-FL) a “Confederate” because she represents a district in an ex-slave state?  Sullivan’s point is nonsensical.

(2) Where was the Left-wing outrage when Senators Barrack Obama and Joe Biden both voted “for default” when they voted “no” on raising the Debt Ceiling in 2006? In fact, all 45 of the Senate’s Democrats voted “for default” on 3/16/06. [2]  Was Obama then the “anarchist”? 

(3) Sullivan writes of “the Republican refusal to countenance any way to raise revenues to tackle the massive debt incurred largely on their watch”.  Largely on whose watch?

On January 31, 2001, the Public Debt was $5.716 Trillion.  [3]

On January 31, 2007, when Nancy Pelosi and the Democrats took over the US House and Senate, the Public Debt was $8.708 Trillion. [4]

On January 31, 2009, Barrack Obama inherited a Public Debt of $10.632 Trillion. [5]

On June 30, 2011, the Public Debt hit $14.343 Trillion. [6]

The math does not support Sullivan.  The facts also show how tricky it is to access blame.  Many Presidencies split power (e.g. Republican Reagan with a Democratic House or Democrat Clinton with six years of a Republican Congress).  G.W. Bush’s last two years were shared with a Democratic Congress.  Who you blame might depend on your partisan predisposition.

The Obama deficits certainly include the impact of the Great Recession.  Nevertheless, the President exacerbated the deficit with his 2009 Stimulus and subsequent spending programs.  People seem to forget President Obama signed into law two brand new, unfunded tax cuts in February 2009 and December 2010. 

(4) Sullivan wants to excuse President Obama for $3.8 trillion of deficits on the theory it was the fault of the Republican Congress voted out of its majority in 2006.  If Obama is not to blame, how can Sullivan possibly blame “the Republicans” when so many of them took their first oath of office in January 2011?  Some 80 GOP House members first won in November 2010 and others were not in Congress for the alleged sins of Bush’s tax cuts.  Many of the newest Tea Party Members of Congress, such as US Rep. Joe Walsh (R-IL), are the same Republicans most opposed to spending increases.   How can the new Tea Party members be held responsible for the accumulated deficits of Obama, George W. Bush and every preceding President back to Woodrow Wilson?  Sullivan is inconsistent.

(5) Sullivan is angry the GOP is “opposing overwhelming public opinion on the need for a mixed package of tax hikes and spending cuts”.    A July 13 Gallup Poll found 50% of Americans want “Only/Mostly” spending cuts, of which 20% were for “only” spending cuts.  Spending cuts are prefered. [7]  This is a curious complaint coming from Sullivan, who had no regard for public opinion on unpopular matters like the “ObamaCare” health care bill.

 

Congress and the President need to come to an agreement to raise the Debt Ceiling.  Personally, I can accept small tax increases in the form of closing loopholes (called “tax expenditures” these days) if coupled with non-gimmick, near-term spending cuts. 

President Obama and the Democrats failed to pass a budget in 2010 and failed to negotiate a budget in 2011.  Holding out for spending cuts in exchange for raising the Debt Ceiling is a blunt instrument but is the one that was available.  Let us not forget it was President Obama who originally asked for a “clean increase” in the debt limit, meaning increase the deficit several trillion dollars with no strings attached. [8]  I am pleased President Obama has found religion and is now interested in a “big” deficit reduction package.  

Furthermore, just giving “clean” raises of the Debt Ceiling over and over again without tackling the underlying problem of spending is no long-term solution.   We need look no further than the pending default of Greece to see what will happen to the USA if we continue to blithely build up our deficit.  My hope is a deal will be worked out in coming days that is a step toward a long-term solution.  Angry press conferences and emotional rhetoric from a prominent writer like Sullivan are no help.    

The fact is it takes two to have a disagreement so if President Obama and supporters like Sullivan really believe what they say about a default, why would they not agree to the Republican “Cut Cap and Balance” position?  Why not give up their prefered tax increases – which they say are so small, anyway – if the alternative is “the country remains in more peril than we know”?

 

[1] http://andrewsullivan.thedailybeast.com/2011/07/americas-cold-civil-war.html

[2] http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=109&session=2&vote=00054.  Technically, Jeffords (VT) and Lieberman (CT) were independents but caucused with the Democrats.

[3] ftp://ftp.publicdebt.treas.gov/opd/opds012001.pdf

[4] ftp://ftp.publicdebt.treas.gov/opd/opds012007.pdf

[5] http://www.treasurydirect.gov/govt/reports/pd/mspd/2009/opds012009.pdf

[6] http://www.treasurydirect.gov/govt/reports/pd/mspd/2011/opds062011.pdf

[7] http://www.gallup.com/poll/148472/Deficit-Americans-Prefer-Spending-Cuts-Open-Tax-Hikes.aspx

[8] “White House officials maintained Friday that the administration wants to see a “clean” increase to the federal debt limit” in http://thehill.com/blogs/on-the-money/budget/156425-white-house-maintains-call-for-clean-debt-ceiling-hike-despite-obama-comments

Two Family Debt Ceilings

In Debt Ceiling, Economy, Obama Administration on July 22, 2011 at 5:03 am

Like so many families, the Bickerers and the Carefrees were hurting from tough economic times.  Mr. Bickerer recently took a new job at lower pay after two stressful months being unemployed.  Mr. Carefree remained employed but had received neither a raise nor a bonus in the past two years.  Carefree’s boss gave him a year-end review much harsher than he expected.  Had Mr. Carefree been of the worrying sort, he might have been concerned about job security.  

The two families happened to be neighbors on the same street.  One sultry summer night, their adjoining bungalows witnessed two very different dinner table conversations. 

The Carefrees did not budget.  Ms. Carefree was processing the stack of bills against their checkbook, which showed a negative ledger balance yet again.  “Honey, these bills keep coming”, she told her husband.  “We need to pay the mortgage no later than the 3rd, but we can stretch the Park District since they don’t charge late fees”.  Barry Carefree responded, “Don’t worry about it, things will get better.  Why don’t we do another cash advance to cover the mortgage?”  The lovely Michelle Carefree did not hesitate to agree, “I think you’re right.  They wouldn’t lend it to us if it wasn’t the right thing!” 

Ms. Carefree pulled the latest MegaBank credit card statement from the bottom of the bill pile and saw they were already at their card limit.  She casually mentioned it to her husband.  Barry replied, “I’ll call the bank for an increase in the credit limit.  MegaBank has always been great about giving me a clean increase with no strings attached.”  Michelle Carefree concurred, “If they’d raise our debt ceiling $4,000, we’ll be good for a couple more months.  Besides, Jimmy really needs the latest xBox.” 

At that exact moment, in the squat brick home on the west side of the Carefree’s chain link fence, Harold Bickerer looked up from “The Boxing Channel” at the frowning face of his wife Paula.  “Harry, I know you’re working extra hours to try to make things work, but something has to change!  I put everything in Quicken and we have to cut something and do it now!” 

Harold Bickerer’s brown eyes dashed to and fro; he was getting agitated.  “We can’t cut anything, we need to live!  I deserve a middle class life.”

Paula held her poise but was firm in tone, “How do you expect to pay our bills if we don’t cut something?  Maybe cut out a Cubs game with the guys.  They always lose, anyway.”  Harry Bickerer frowned, he hated lame Cubs jokes.  He fell back on his old staple, “Home equity loans are made for times like this.”  Paula’s eyes rolled but Harold went on, “If we can just get through the next few months, my boss promised merit increases will be made in January.”

Paula’s spreadsheet showed they were close to the limit on their home equity line.  With the declining value of homes in their neighborhood, Paula doubted they’d be able to get the bank to approve an increase in the ceiling on the line.  Her spreadsheet also showed a family on the financial edge and she was dead set against borrowing a penny more without significant spending cuts. 

Mr. and Ms. Bickerer went back and forth for several minutes, negotiating ideas that neither could agree on.  Redbox instead of the monthly family trip to the multiplex?  Could she trade down to a lesser hair stylist?  Why won’t he drop microbrews and go back to Budweiser which, by the way, he happily drank all through college? 

Harold had several ideas for cutting spending, though they always involved someone else making the sacrifice and tended to be far into the future.  Cut back on next year’s summer camp?  Send the baby to community college with a transfer to a less expensive state university so they could drop the small monthly 529 contribution?  He also pushed Paula to increase revenues:  couldn’t she ask her mom to watch the baby just a few hours every day so Paula could take a part-time job at Target?

 

As the Carefrees nestled in for another comfortable night’s sleep in the cool air conditioning, the Bickerers kept talking.  The bills had to go out in the next day or so, yet the couple made the deadline, working out a plan by midnight.  The Bickerers plan wasn’t fun for anyone but it did spread the sacrifice.  Paula would get a part-time job on the weekends, leaving Harold to watch the kids, which would also cut his weekend spending with “the guys”.  The whole family would eat out less, cut back on movies and trade down to more store brands at the grocery store. 

The good news was the Bickerers would get their spending under control and their plan stopped adding to their debts.  On the east side of the fence, the Carefrees would not have slept quite so soundly if they knew the truth that an automated algorithm on MegaBank’s risk management computer was just then scoring Barry Carefree’s credit card account as too risky and flagging “DENY” for his next request to raise his credit card limit.