Wow. So here we are again.
Washington is spoiling for a fight over the country’s debt ceiling — less than a year after a showdown that induced a credit downgrade, rocked the markets and eroded confidence in Congress.
Last week, House Speaker John Boehner said he would not permit another increase in the country’s legal borrowing limit without a larger amount of spending cuts and reforms approved in tandem.
"I suspect blood pressure readings went up [that] afternoon," said budget expert Joe Minarik, senior vice president of the Committee for Economic Development.
That would be understandable given how damaging the last debt ceiling showdown turned out to be.
But we’ll get to that in a minute. First, it pays to remember just how the debt ceiling actually works.
What is the debt ceiling exactly? It’s a legal cap set by Congress on the amount of money the federal government can borrow. The ceiling applies to debt owed to the public (i.e., anyone who buys U.S. bonds) plus debt owed to federal government trust funds such as those for Social Security and Medicare.
The first limit, established in 1917, was set at $11.5 billion, according to the Committee for a Responsible Federal Budget. By setting a limit, Congress gave the Treasury Department authority to borrow money as needed. Previously, Congress had to sign off every time the federal government issued debt.
How high is the debt limit right now? The ceiling is currently set at $16.394 trillion. The country’s accrued debt subject to the limit as of Friday was $15.670 trillion. (Here’s where the Treasury posts daily updates of the number.)
When will we hit it? Treasury Secretary Tim Geithner has said he estimates that U.S. borrowing could hit the debt ceiling by the end of 2012.
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But by taking "extraordinary measures" — such as suspending investments in federal retirement funds — Geithner might be able to buy enough time to keep borrowing below the legal limit until early 2013.
How is the ceiling determined? They never admit it, but every time lawmakers vote to hike spending or cut taxes and not pay for them, they’re tacitly acknowledging that the debt ceiling will need to raised in the future.
So arguing over the debt ceiling after the fact is essentially arguing over whether to pay the bills the country has already incurred and which Congress has already approved.
How many times has the ceiling been raised? Since March 1962, debt ceiling increases have been enacted 76 times, according to the Congressional Research Service. Congress has voted to raise the ceiling 11 of those times since 2001.
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Expect more of the same over the next decade. Barring major changes to spending and tax policies, "Congress would repeatedly face demands to raise the debt limit," CRS wrote.
Why does Congress even bother to set a debt limit? In theory, the limit is supposed to help Congress control spending. In reality, it doesn’t.
Every time the debt limit needs to be raised, lawmakers and the president are forced to take stock of the country’s fiscal direction, which in theory isn’t a bad thing.
But the decision about how high to set the ceiling is usually a political one — depending on how quickly the minority party wants to raise the issue again for political gain or to extract concessions.
In any case, the vote usually comes after lawmakers have already passed the spending hikes and tax cuts that necessitate an increase in the first place.
What happens if Congress doesn’t raise the debt ceiling? Treasury would not be able to borrow any more money no fax pay day loans.
That means the government would fall short of what it needs to pay all its bills in full, which include funding government operations and paying creditors and contractors.
During last year’s debate, Geithner’s critics said he could prevent default by simply paying the interest due to bondholders.
But since average spending — minus interest — outpaces revenue by about $115 billion a month, Geithner would have to pick and choose whom to pay and whom to put off every day.
And there’s no guarantee that paying interest while shirking other legal obligations will protect the country from the perception of default.
Geithner said it would be akin to a homeowner who pays his mortgage but puts off his car loan and credit cards. Translation: the homeowner’s credit could still be damaged.
Ultimately, if lawmakers fail to raise the ceiling, they will have two choices, both awful.
They could immediately enact massive spending cuts or tax increases. Or they could acknowledge that the country would be unable to pay what it owes in full and the United States could effectively default on some of its obligations.
The first option is impossible to execute without serious economic repercussions. And the second option could cripple the economy and send world markets into a tailspin.
"Not only the default but efforts to resolve it would arguably have negative repercussions on both domestic and international financial markets and economies," according to the CRS.
Will reaching the debt ceiling cause a government shutdown? Technically, no.
A government shutdown occurs if lawmakers fail to appropriate money for federal agencies and programs.
By contrast, if the debt ceiling is breached, Uncle Sam would still have revenue coming in that could be used to fund the government, noted Rudolph Penner, a former Congressional Budget Office director.
But if Geithner is coming up short by $115 billion on average every month, and lawmakers just decide to cut spending by that amount, that could effectively mean a partial government shutdown.
So what happened last year? The 2011 debt ceiling showdown resulted in a three-part increase to the debt ceiling in exchange for, among other things, at least $2.1 trillion in debt reduction over 10 years.
The debt ceiling deal — known as the Budget Control Act — also empowered a so-called super committee of lawmakers from both parties to negotiate how to achieve at least $1.2 trillion of that debt reduction.
That committee failed, however, thereby triggering a sequester of nearly $1 trillion in automatic spending cuts, mostly across defense and nondefense discretionary spending. That latter category pays for many common and popular governmental functions, from food inspections to the operation of national parks. Those cuts are set to start taking effect in January 2013.
Many lawmakers hate those cuts– but apparently not enough yet to negotiate a bipartisan deal to replace them.
The debt ceiling showdown of 2011 also created a lot of bad blood between the parties and between Republicans and the White House.
And it sparked the first-ever downgrade of the U.S. credit rating by Standard & Poor’s, which cited political brinksmanship as the chief cause.
That, in turn, caused one of the most volatile weeks in world markets and left Americans and investors with the sense that Congress can’t handle even the most elemental tasks without a lot of destructive drama.
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Stock futures are rising ahead of economic data focusing on consumers and businesses.
Dow Jones industrial average futures are up 57 points to 12,712. Standard & Poor’s 500 futures are up 7.9 points to 1,342. Nasdaq composite futures are up 19.25 points to 2,604.25.
The Commerce Department is expected to report Tuesday that consumer spending growth slowed to 0.2 percent in April after a very strong start to the year.
And economists expect the Labor Department will report that spending cooled even though prices likely increased only modestly last month. Consensus estimates are for a consumer price index increase of only 0.1 percent in April.
The government also releases business inventory data from March. Predictions are that companies likely restocked at a slower pace.
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United Technologies Corp. says net income from continuing operations rose more than 19 percent during the first quarter, factoring out the businesses that the manufacturer put up for sale.
That would equate to earnings of $1.26 billion, or $1.31 per share, compared with earnings from those same operations last year of $1.05 billion, or $1.06 per share.
That tops the $1.21 expected on Wall Street, according to a poll by FactSet.
The parent company of jet engine maker Pratt & Whitney, Otis elevator, Carrier heating and cooling and other aerospace and building systems companies said Tuesday that revenue was $12 payday loan.42 billion in the January-March quarter, down 2 percent from the same period last year.
Including the discontinued operations, net income fell to $330 million, compared with $1.01 billion last year.
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The Consumer Confidence Index is released each month by the Conference Board, a private research group. It is based on a survey of five questions that haven’t changed since the index started in 1967.
The Conference Board surveys about 500 people during the first two weeks of the month, and then comes up with a preliminary number. That number is revised in the following month’s report to reflect a total of about 3,000 people. The revision isn’t statistically significant, says Lynn Franco, director of The Conference Board Consumer Research Center. For example, September’s preliminary figure, announced last month was revised to 46.4 from 45.4.
Each question counts for 20 percent of the index. The responses are used in figuring out the index’s two main components:
_ PRESENT SITUATION: Assesses how people feel about the economy now fast cash now. It’s made up of two questions, one that asks if the person thinks business conditions are “good,” “bad” or “normal,” and one that asks whether jobs are “plentiful,” “not so plentiful” or “hard to get.”
_ EXPECTATIONS: Assesses respondents’ outlook for the next six months. It asks similar questions to the Present Situation about business conditions and job outlook. It also adds a third question on whether the person thinks his or her income will increase, decrease or stay the same.
The index hit its all-time high of 144.7 in 2000. Its record low was 25.3 in February 2009.
U.S. stock futures are up ahead of another round of economic data that should shed further light on whether the recovery in the world’s largest economy is still picking up steam.
Dow Jones industrial futures rose 23 points to 13,195. The broader Standard & Poor’s 500 futures are up 2 points to 1,398. Nasdaq 100 futures are up 4 points to 2,716.
The market has rallied on upbeat U.S. economic data and easing worries about European debt, despite some concern over the rise in oil prices. On Thursday, the Standard & Poor’s 500 index closed above 1,400 for the first time since June 2008.
Later Friday, the focus will be on consumer inflation and industrial production figures as well as the closely watched University of Michigan consumer confidence survey.
Oil prices rose slightly to near $107 a barrel Wednesday in Asia after a large drop the day before amid mixed signs about the strength of U.S. crude demand.
Benchmark oil for April delivery was up 42 cents to $106.97 midday Singapore time in electronic trading on the New York Mercantile Exchange. The contract fell by $2.01 to $106.55 per barrel in New York on Tuesday.
Brent crude was up 60 cents to $122.15 per barrel in London.
U.S. crude and oil product inventories were mixed last week. The American Petroleum Institute said late Tuesday that crude inventories rose 521,000 barrels while analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., had predicted an increase of 1 million barrels.
Inventories of gasoline fell 916,000 barrels last week while distillates dropped 3.3 million barrels, the API said.
The Energy Department’s Energy Information Administration reports its weekly supply data later Wednesday faxless payday loans.
An improvement in consumer sentiment helped bolster oil prices in Asia. The Conference Board, a private business research group, said Tuesday that consumer confidence rose to a one-year high in February. However, the government said orders for durable goods in the U.S. in January had the biggest fall in three years.
Crude has jumped from $96 earlier this month amid growing tension over Iran’s nuclear program. Investors will be closely watching the latest data on U.S gross domestic product and industrial production due to be released later Wednesday.
In other energy trading, heating oil rose 2.2 cents to $3.24 per gallon and gasoline futures gained 1 cent at $3.23 per gallon. Natural gas added 1.9 cents at $2.54 per 1,000 cubic feet.
Signed contracts for home resales rose to a nearly two-year high in January, an industry group said on Monday, further evidence of a budding recovery in the housing market.
The National Association of Realtors said its Pending Home Sales Index, based on contracts signed in January, increased 2 percent to 97.0 - the highest reading since April 2010.
December’s reading was revised down to 95.1 from a previously reported 96.6.
Economists polled by Reuters had expected signed contracts, which lead existing home sales by a month or two, to rebound 1.0 percent after a previously reported 3.5 percent fall. Contracts signed were up 8.0 percent in the 12 months to January.
A nascent recovery is under way in the housing market, with the supply of both new and previously owned homes on the market being whittled down in recent months.
But with the foreclosure tide yet to recede and continuing to depress prices, recovery will be a long, drawn-out affair.
Hammered by the financial crisis that has led to ever diminishing income, a group of residents in northern Greece have joined forces with potato farmers to slash consumer prices and ensure producers can get their crop to markets by cutting out the middle man.
Hundreds of families turned up Saturday in this northern Greek town to buy potatoes at massively reduced prices, sold directly by producers at cost price. They lined up in cars and with bicycles, on foot and with scooters to collect their bags of spuds from a truck that flung its doors wide open and was doing a roaring trade in the parking lot of a local courthouse.
Farmers say it costs about 20 cents ($0.27) to produce a kilogram (2 pounds) of potatoes, but that wholesalers will only buy them for 10-12 cents to get the crop to supermarkets, where they sell for about 60-70 cents a kilogram. Faced with making a loss, many producers say they have been unable to even get their products to the market.
Greece’s severe financial crisis, now entering its third year, has seen pensions and salaries slashed and led to skyrocketing unemployment of over 20 percent. More and more people have been turning up at soup kitchens run by the church or local aid groups, and homelessness has been increasing.
Faced with an ever deepening recession, some local groups have begun coming up with novel ways to beat the financial crunch.
Ilias Tsolakidis, 54, part of a volunteer group in northern Greece, said he contacted a potato farmer in northern Greece last week and posted an advertisement on the internet offering consumers the chance to order directly from the producer at cost price. He was overwhelmed by the response: by Wednesday, all 24 tons of potatoes on offer had been sold, with 534 families putting in orders.
His motive, Tsolakidis said, was “to cover a financial gap in the family budget. You know, the situation in the financial crisis has become very difficult. We help producers (from the local area) on the one hand, and also the families of consumers.”
Kiki Pantelopoulou couldn’t agree more.
“I didn’t only do this because it’s in my interest,” said the 42-year-old as she loaded a sack of potatoes onto her bicycle. “My main concern is how to stop this situation. This way, we favor Greek products and therefore producers can at least make the cost price.”
Tsolakidis said that with demand so high, his group of volunteers would set up another sale next weekend, buying another 24 tons of potatoes from a different farmer this time.
Konstantinos Karanikos, 67, said his son helped him order sacks of potatoes from Saturday’s sale over the internet, but could only secure half the amount he wanted because the demand was so high. “We will order again next weekend,” he said. “The important thing is for the producer to be satisfied and the consumer to have cheap potatoes.”
With the crop being sold at cost price of 20 cents a kilogram, Lefteris Kostopoulos, the farmer who put his spuds up for sale Saturday, didn’t make any profit on the transaction. But, he said, at least he managed to break even and sell more than half of the produce he had stored up in a warehouse.
“This group’s move was very good. It helped us shift the amounts we had in the warehouses, and we didn’t give them to the wholesalers who are asking for 10-12 cents per kilo,” he said. “We might not make money here, because we’re essentially breaking even, but at least we aren’t making a loss.”
Kalypso Skouba, 44, said she hoped the new movement spread to other products soon, so she could buy more vegetables or fruit directly from producers.
“I bought potatoes today just to show that it can’t only be the middlemen who make money,” she said.
Greece’s international creditors have spelled out the austerity measures promised by Athens that have to be put into practice before it can receive new bailout cash, totaling more than euro2.5 billion ($3.31 billion).
Those budget cuts include:
_ euro1.076 billion ($1.43 billion) to be cut from the country’s pharmaceuticals spending
_ euro300 million ($397 million) in military budget cuts
_ euro270 million ($358 million) to be slashed from regular government expenditure and election-related budgets
_ euro190 million ($251 million) to be trimmed from subsidies to people living in remote areas
_ euro400 million ($530 million) in public investment budget cuts
_ euro300 million ($397 million) in budget subsidies to pension funds
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