Tuesday, July 12, 2011

The Federal Debt Limit and the housing market

I'm not an economist, but the more I try to learn about economics by reading the work of those who are, the more I realize it is a field with wildly different interpretations of the facts and prescriptions for solving the country's problems. When I read that a failure by the Federal government to increase the nation's debt limit by August 2 will be disastrous to our economy, I'm not sure whether to believe it. Are these the same people who were oblivious to the housing bubble back in 2004-2007? If so, they don't have a lot of credibility with me.

Still, common sense tells me that a failure to reach a deal on this - presumably some combination of cuts and revenue increases - will be a bad thing. There won't be enough money to pay all of the country's bills and so payments of the money that is available will have to be prioritized. What gets paid first: interest to bond holders or combat pay to a GI in Afghanistan? Where do folks relying on social security fit? It's all unknown at this point.

When a household has trouble paying its bills, its credit rating deteriorates and it costs more to borrow money in the future. I assume the same thing will hold true for the US. To attract money we will have to pay higher rates of interest. That, in turn, will have a collateral effect on the housing market. If interest rates on US obligations rise, so will mortgage rates. With the housing market as bad as it is already, a spike in the cost of borrowing would be an enormous setback.

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