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Friday, Jul 22 2011 12:00 PM

Three Thoughts: What does the debt ceiling debate mean here?

By THE BAKERSFIELD CALIFORNIAN

It would be easy to view the negotiations over raising the national debt limit as just one more manifestation of Washington politics. Maybe they are -- but the impact of these discussions goes well beyond that.

The financial world has taken particular interest in these talks because of their potential to disrupt the national economy. But even so, it isn't always clear how much of our local economy is on the line.

Our question: What are the local implications of the national debt ceiling debate?

Responses may have been edited for length or clarity.

The debt ceiling debate has far-reaching effects not just globally but also locally. The arguments against raising the debt ceiling are strictly based on the need to cut spending. In actuality, raising the debt ceiling and cutting spending are two separate yet very important issues.

The problem with not raising the ceiling is the high probability of America defaulting on its obligations. This would lead to a catastrophic chain of events. Interest rates would immediately skyrocket, credit ratings would be downgraded and the already massive debt we currently own would continue to spiral out of control. As the costs for borrowers increase, fewer and fewer are able to use credit to expand businesses, hire new employees and buy goods and services.

Locally we all rely on credit. Those who are self-employed often rely on credit to help with cash flow through slow seasons and for expansion. Those not self-employed rely on their employer to run a viable business that frequently relies on credit. The implications of a downgrade to the United States credit rating trickle down all the way to Bakersfield, and into each and every one of our homes. Spending must be reined in and debt must be paid back.

-- Sherod Waite, financial advisor and partner, Moneywise -- Wealth Management

Many of the local implications depend on the intricacies of the final negotiations and what is actually written into the bill. Odds favor an eventual agreement and a raising of the debt ceiling.

Nobody really knows what might happen if we do not raise the debt ceiling, but defaulting on our debt would cause interest rates to rise as buyers of our treasuries demand higher rates for the increase in potential default risk. I would assume there would be heavy selling pressure in the stock market also. These potentially painful results make it much more likely that a deal will get done as no political party wants to be blamed for any possible pain or chaos, especially with a presidential election in 2012.

Much of the debate revolving around tax revenues versus spending cuts boils down to actually solving the debt problem or putting it off until later. Obviously, there are politically entrenched philosophical differences on how to best solve the debt dilemma. This is one of the reasons negotiations have been more difficult than normal. Any implemented spending cuts seem like they will be drawn out over many years, and so they should not be too painful for local residents. Any negotiated tax increases will be difficult to get passed, so there should not be any painful extremes to local residents or businesses.

-- Daniel Petrey, wealth advisor, Mestmaker & Petrey Wealth Advisors Inc.

On Aug. 3, the United States government will not have the borrowing capacity or the revenue to make payments on ALL the promises that Congress has legislated. Federal income will be reduced by 40 percent. This does not mean the United States is out of money, because revenues continue to flow to the treasury. It means that no one knows how the government would prioritize the spending of these lower revenues after payments are made on its current debt interest. This uncertainty of priorities would cause confusion to the financial world, although most economists agree that "due date" payments such as Social Security would be paid.

So, how will we be affected locally? The U.S. credit rating would be lowered, causing higher interest rates. This would increase rates on all consumer loans, like mortgages, auto, credit and college. The financial stock markets would possibly drop because of higher borrowing costs to corporations (which would have the effect of reducing profits). These higher borrowing costs would likely be passed to us in higher prices on everything we purchase.

Let us push our leaders to compromise in the short term while continuing to focus on the long-term reduction of our national debt. Compromise is not surrender as some would have us believe.

-- Mike Bowles, president, Bowles Financial & Insurance Group Inc.

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