It’s crisis time again in Washington, D.C. Having just barely avoided a swan dive off the fiscal cliff, the leaders of our country are now locked in battle over the pending sequestration.
“Locked” is the operative word here, as the deep freeze that’s hit New England this week is likely to thaw well before the freeze in progress over sequestration.
If nothing else, this standoff has added to our vocabulary. “Sequestration,” as we’ve learned, is a procedure that triggers automatic spending cuts. It also means “the seizure of property for creditors,” as in, “China will begin sequestering U.S. property if we can’t control our debt and pay our bills.” That definition may be more appropriate in years to come, but for now, let’s concentrate on the immediate future.
If an agreement is not reached by March 1, across-the-board budget cuts of $85 billion will take place. That’s $85 billion from a budget of $3.8 trillion, or a cut of about 2.5% of the budget.
Some are predicting that if sequestration takes place, the U.S. economy will go back into recession. As we’ve previously noted, the economy has been growing about 2% a year, which is well below its average of 3.22% a year. It actually shrank by 0.1% in the fourth quarter.
If we go into a recession again, will anyone notice?
Impact on the Housing Market
In an era when we’ve all undergone some level of austerity, you’d think a little belt-tightening would be a good thing.
However, quoting U.S. Secretary of Housing and Urban Development Shaun Donovan, CNBC says these “massive” cuts in the federal budget will be “deeply destructive” to all aspects of the housing market.
Given that the improving housing market is perhaps the brightest spot in the economy, no one wants to inhibit its recovery.
But consider Donovan’s reasoning. Because of the cuts, he said, the Federal Housing Administration (FHA) will “likely” lose staff, which would cause it to “lose much of its capacity to process new home loans and mortgage refinances, as well as sell foreclosed properties that it owns.” We’re not sure how to interpret his use of the phrase “much of,” but it sounds like a heck of a lot more than 2.5%. And, during these times when more revenue is needed, wouldn’t it make sense to perhaps concentrate more effort on selling foreclosed properties?
One-time gains are better than loses. And once the property is sold, the FHA will have a smaller and more manageable portfolio, so that maybe if could handle a 2.5% budget cut.
The War for Weakness Continues
Making matters worse, the U.S. is losing the war for weakness we discussed last week. The dollar is weak, of course, but the euro is even weaker.
As CNBC noted, “The single currency has fallen to a six-week low against the dollar, falling to $1.3166 on Thursday, far below a 15-month peak of $1.3711 seen at the start of February. The decline came as euro zone purchasing managers’ data (PMI) released on Thursday showed a downturn in the region’s economic activity and investor concerns over Italian elections this weekend rattled confidence.”
Maybe if sequestration takes place, the U.S. will go back into a recession and the dollar will weaken, which will send the stock market soaring. That must be the plan.