US Debt Ceiling Negotiations:
Off-Budget Spending Vehicles Need Reform Now
The Dynamic Wealth Report
June 1, 2011
by Karl Stevenson, Editor
I'd be willing to bet most of America is in the dark on this one. And
quite honestly, we need to shed some light on the matter.
At this moment, Congress is voting on raising the debt ceiling. And the
first go around failed to pass the House miserably... as expected.
And you should be concerned with the debt ceiling vote. Because failure
to increase the debt ceiling could dramatically impact your portfolio. Before I talk about the dirty secret, let's discuss the debt ceiling
vote first.
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I'm sure you're aware by now we've run into our debt ceiling. The
debt ceiling is the official limit of debt in the United States...
and
it currently sits at $14.3 trillion.
With US debt likely to remain at high levels for some time, our
government needs to address the issue now. Simply raising the debt level
without addressing the underlying spending issues won't solve the real
problem.
If we don't increase the debt ceiling, the US government will be unable
to pay the interest on their obligations. And it will lead to multiple
credit rating agencies downgrading US debt!
A downgrade of US debt would create mass chaos in the markets... the
bond markets would be in a tailspin. Investors will pull money out of
America and move it overseas.
While you may not care about anything our Congress does, you might want
to pay attention to what's next...
And America's dirty little secret could cause more chaos than even a
debt ceiling default.
I'm talking about Fannie Mae and Freddie Mac.
If you're wondering how they can affect you and your retirement, let me
explain. Because the effects can be catastrophic...
The debt ceiling vote and controlling US spending is just a start. What
we really need is to get rid of the massive "off-balance sheet" debt.
That means we need to forever banish Fannie and Freddie!
S&P already has warned the US about a pending credit downgrade if we
don't address these issues, regardless of any debt ceiling expansion.
Here's where Fannie and Freddie come in... They are simply the two
largest off budget spending vehicles in the country, if not the world.
Let me put it in perspective... according to the Wall Street Journal,
the two agencies are in the hole to the tune of $200 billion. So we've
got quite a mess on our hands.
Why do Fannie and Freddie matter to US debt?
To start, you need to know all of the mortgages guaranteed by Fannie and
Freddie are financed by mortgage backed securities. As of now, the US
government backs Fannie and Freddie's debt. So any losses from falling
mortgage values are funded by the US taxpayer.
It's pretty clear, any increase in the debt ceiling without a clear and
specific timetable to off-load Fannie and Freddie is pointless.
And I only point the fact out as S&P has warned the US about it already.
They're wise to the game the US government has been playing. The bottom
line... the longer Congress allows Fannie and Freddie to stay in
business, the more the US credit rating is endangered.
We need to make sure our representatives include Fannie and Freddie
reform in the debt ceiling/entitlement spending debate going on right
now.
S&P has made the case pretty clear... either clean up the mess or pay
the price. Downgrades to our credit ratings are a probability if Fannie
and Freddie are left as is. And the damage they could cause would roll
global markets.
You may not normally care about what Congress does, but let's hope they
get this one right...
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