What might be most surprising about the myriad economic problems around the globe right now is how many major world economies seem to have been taken by surprise by the concept of debt. Maybe they should have been reading more Margaret Atwood.
Atwood isn’t only one of the world’s premier novelists, she’s also the author of the nonfiction “Payback: Debt and the Shadow Side of Wealth,” which hit the presses just as the financial crisis arrived in the fall of 2008 (timing that one review described as “freakishly prescient”).
Atwood is currently releasing her new essay collection about science fiction, “In Other Worlds,” and sat down with Reuters Money for coffee in Manhattan. We chatted about how debt has been dominating the headlines – and, perhaps, reshaping our sense of self.
Reuters Money: How did the issue of money and debt come to interest you?
Margaret Atwood: I came to this subject through studying literature. Money is everywhere. Charles Dickens, for instance, is completely obsessed with debt. His father went bankrupt, and was thrown into debtor’s prison. As a child, Dickens had to go off and work in the factory, and he never forgot it.
After two years without an inflation adjustment, the Social Security Administration is expected to announce a 2012 cost-of-living adjustment (COLA) of more than 3 percent next week. That would be a sizable raise in this economy, and very welcome news to seniors hit hard by rising costs, slumping home equity and very low returns on fixed-income investments.
But the good COLA news will come with a nasty kicker. Many seniors will see a substantial part of the COLA consumed by a higher premium for Medicare Part B (doctor visits and outpatient services), which usually is deducted from Social Security payments. The situation sheds light on the complex interaction of Social Security COLAs and Medicare premiums — and it underscores the critical importance of the Super Committee deficit deliberations on possible cuts to future COLAs.
Once the debt ceiling rancor faded, financial gurus and observers had little reason to think debate on taxing the wealthy would ignite again before Nov. 23. That’s when the 12-member congressional super committee issues its recommendations on finding at least $1.2 trillion in deficit reduction.
Then came President Obama’s announcement on Monday of the “Buffett Rule,” a plan to raise taxes on American households making more than $1 million annually. Suddenly, the millionaires who support such a plan — like Warren Buffett himself — had cause for hope after many months of anti-tax furor and tax hike inaction.
Ratings agencies helped spark the financial meltdown of 2008-9, when they deemed that steaming piles of mortgage junk were brimming with triple-A goodness. They were wrong – and epically so.
Now S&P downgrades the debt of the entire country, further threatens to do so another notch, teams with fellow ratings agencies to bring Europe to its knees with each new appraisal and gets an assist for wiping trillions in wealth from investors’ portfolios in just a few days.
The legislation to lift the debt ceiling gives the country a framework for more than $2 trillion in budget cuts over 10 years and avoids default. But it also puts off discussion of taxes for another day — and it’s unlikely that we’ll see any movement on tax reform or significant tax changes until 2012.
“If I were at a roulette table in Vegas, I would put almost all my chips on a square marked ‘Lame Duck,’” says Clint Stretch, managing principal of tax policy in Deloitte Tax’s national office in Washington, D.C. “I see nothing that Congress will regard as a ‘must do’ in the tax area before a lame-duck session in 2012.”
Rick Ashburn is a chartered financial analyst and the founding Principal Chief Investment Officer of Creekside Partners, based in Lafayette, California. The opinions expressed here are his own.
As the two – or is it three? – political parties in Washington lurch toward a budget agreement, what are the longer-term implications of the situation we find ourselves in? We have a lot of public debt combined with the rather serious economic headwinds that rapid deficit reduction always entail. And at the same time that we need to reduce our debt load relative to GDP, our real GDP growth is likely to be sub-par.
Reuters Money reached out to members of the financial community to see how they’re calming the folks they advise. An overwhelming majority expressed faith that lawmakers would broker a deal by the deadline, and markets would adjust regardless.
Here are 10 reasons they give not to juggle your investments right now.
1. A short-term crisis demands long-term thinking.
While it’s true a debt ceiling crash might resemble the sky falling, no one knows if that’s going to happen. Markets reward investors who stick to sensible strategies over time. “Rather than obsessing about the debt debate, we are telling clients to get engaged in a long-term conversation about risk management,” said Michael Gault, senior portfolio strategist at Weiser Capital Management. Gault, who manages $200 million, stressed that the last few months on Wall Street have been good ones. “The concept of ‘risk’ has taken a back seat as the markets’ recovery has been in a relatively smooth upward trajectory. We think there’s tremendous value in rebalancing here.”
No matter what plan Washington concocts to reduce the deficit, it’s going to cost you something. “Shared sacrifice” is in vogue, but your pain will be bigger if you’re unfortunate enough to earn wages or need social benefits.
Most conservative deficit-reduction plans shred the social safety net and cherished personal write-offs in unprecedented ways. The core elements of each proposal will pare middle-class tax breaks, Medicare and Social Security.
The debt crisis negotiations may yield no more than a short-term Band-aid and sidestep long-term changes in spending policy. But it’s clear that the Obama Administration and some lawmakers are reaching for a big deal patterned on ideas developed by politicians positioning themselves as bipartisan budget peacemakers.
Social Security is a pawn in the negotiations to avoid a federal debt default, and that has stirred fear and confusion among current and future beneficiaries. President Obama has threatened not to make August benefit payments in the event of a default, and signaled that he is open to cutting Social Security if it helps him secure a big deficit-reduction deal with Republicans.
Let’s look at where Social Security stands on the D.C. chessboard:
Should I be worried that I won’t receive my Social Security benefit in August?