Will the Budget Stalemate Cripple the Economy

As we should all remember, late in the night on New Year’s Eve, Congress and the President reached a brief stop-gap agreement to keep the Nation operating while they worked on the Budget. Unfortunately, in the months that followed the political infighting stopped any resolution and so, a drastic series of cuts automatically took effect called “Sequestration”. It was never intended to take effect but rather was designed by our leaders in Washington to create an alternative so bad, that it would force them to cooperate with each other in solving our nation’s financial problems. But how bad could it be?

Under Sequestration, Federal spending for 2013 alone will be cut $85.4 Billion nearly half of which will be in military spending with over 25% more coming from domestic cuts to health, education, and public safety. On top of this, the Fed are schedule to cut spending by another $110 Billion is each of the next 9 years! So why is the economy booming? There appears to be two reasons:

First, many of the Federal agencies, especially the military, have been working through pre-funded contracts, most of which are now being completed. We haven’t felt the cuts yet but these will impact any new contracts to be made. Few people will directly lose their jobs but we’ll all likely feel the trickle-down effect in the months to come;

Second, while the Feds are cutting, over at the Federal Reserve they’ve been continuing a Policy called “Quantitative Easing”. This has two forms: 1) printing more money which the government then uses to buy bonds from big banks – in effect giving them cheap loans – which in theory will stimulate the economy by driving down interest rates and through this make business expansion and the purchase of homes, and other assets; or 2) selling government bonds to raise cash which the also feed into the economy. Since December, 2012 this stimulus has equaled $85 Billion per month!

So, on the one hand, the government is cutting its spending while on the other it’s pushing cheap money into the economy and expanding the national debt. Can this economic system work? Well, note what happened two weeks ago when the Fed Chairman, Ben Bernanke, announced that the Fed was going to cut back the stimulus. Interest rates immediately jumped, slowing the economy.

Back in Congress, the fights over how to fix this mess have continued without resolution. The Republican-controlled House wants to continue the Sequestration cuts and shrink the Federal government. The Democrat-controlled Senate wants to end Sequestration and restore the Billions in government spending which will also require raising the federal debt limit above $16.7 Trillion. Unless a resolution is reached by October 1st, the government will run out of money and shut down. If this happens, then within a few weeks thereafter, the Fed will be unable to pay the government’s debts, and our nation will default.

Certainly we would all hope that our leaders in Congress will be able to find a common ground for the public good. Yet, today they’re all leaving Washington for the next 5 weeks. Since they haven’t been able to find a common ground in over 9 months of trying, it’s not likely that they’ll get anywhere in the three weeks they have left after their return.

It does not appear that anyone out there really knows for sure what’s going to happen here. Businesses are holding onto their cash rather than expanding and creating new jobs; real estate investors that bought large pools of properties in the slowdown my be starting to flip them back to the market, a trend that can undermine the current Seller’s market by dramatically increasing the inventory of homes for sale; and buyers, especially move-up property owners, fearful of both rising interest rates and a questionable market, may decide to stay put. For retired people and others on fixed incomes, the message is save your money because the costs of goods and services will likely rise.

This Article is not intended to scare you. Rather my purpose is to inform you so that you will be aware of and follow what’s going on in the economy. The two political parties are deeply divided not just on political grounds but more importantly on deeply held beliefs of what our government and Nation should be now and for generations to come. I don’t believe that this is just a political game and so compromise and resolution will likely remain hard-fought… and it will likely affect us all.

BPE Law has been assisting our clients with their real estate, business, and other legal needs ever since we started doing business. We’re active in the communities in which we live and in protecting and expanding our clients’ opportunities for business and real estate ownership … and providing assistance when they’re challenged. If you have questions concerning real estate, business, or any other legal matter, give us a call at (916) 966-2260 or e-mail me at sjbeede@bpelaw.com. Our flat fee consult for new clients may get you the answers you need for the questions you have.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.