Capital Commerce: Borrower, beware
There's a lot of debate in Washington these days about plans to spend big money on cleaning up after Katrina. This, on top of the promises President Bush has made to continue to push for more of his "ownership society" in the form of further tax cuts and other inducements to save and invest.
Well, it turns out America is becoming more of an ownership society without any prompting from politicians, if one looks at recently released Federal Reserve Board data. In fact, it's the rising value of owned assets that is keeping the economy afloat.
The so-called flow-of-funds data show that in the second quarter the net worth of U.S. households swelled to $49.83 trillion. Rising home, pension, and mutual fund values drove the increase, which in turn led to a 7.3 percent increase in borrowing. That was somewhat below the 9.9 percent borrowing increase in the first quarter. But the decline came from a slowdown in government activity, not consumer loans.
The numbers help explain why politicians avoid the hard choices about staying on a budget and continually spend more than the country takes in: After all, isn't that what their constituents do?
But the government will need to take on even more debt to pay for Katrina's cleanup–and Hurricane Rita's too, once that storm strikes the U.S. mainland. There is some evidence that the pace of home price gains is slowing, and who knows about the stock market? How long the country can continue to borrow as if there's no tomorrow, spending away a huge portion of its equity, is anyone's guess. Data like the Fed's suggest the day of reckoning is postponed again, but just as those who choose to live below the sea level are finding out, defying reality is not something that can continue forever.
Capital Commerce tells usnews.com readers how decisions made in Washington affect business.