So, I guess we are destined to witness the brinkmanship and Kabuki theater that goes along with debt limit negotiations, again. The great enterprise called USA Inc. will be figuring out how much it is willing to borrow in the next round of refinancing it’s going to commit to. If only we could be spared the theatrics … just once.
Enterprise finance is complex and ever changing. It is thus only remotely similar to personal finance. The cost of money and the way that enterprise finance must continually refresh how it levers assets and (prospective) cashflow to adjust to the cost of borrowing is just good practice.
Some compare the debt limit to personal finance without understanding of the key differences between personal finance and enterprise finance. No surprise such comparisons are faulty. To compare the debt limit to a personal mortgage, we must not distort the meaningful way that comparison might be made. That is, a mortgage comparison must be a true comparison, rather than some intuitive one.
Intuitively, we want to express something familiar, so we formulate similarities that are intuitively relatable. But these similarities are often erroneous. Most individuals and families with a primary home mortgage as their largest single asset/debt have little to no interest in the complicated finance that enterprises like real estate investment trusts employ.
One recent opinion polemically utilized a hypothetical $600,000 “new additional mortgage bill” in sham outrage without thinking through how such a mortgage might actually work. Let’s reuse that $600,000 value in a meaningful way to provide an accurate comparison.
Accepting a new debt ceiling is definitely like an additional $600,000 mortgage. It’s like a $600,000 cash-out refi on your home, underwritten by higher market valuation. Such a mortgage refinance may be particularly appropriate when $600,000 is a small fraction of the appreciation of your asset, say, if you (lucky dog) own a $7.6-million home. The $600,000 is an approximate 10% equity gain you tap to upgrade the kitchen, buy another asset, or any other expenditure you can afford to finance. (Aventador Roadster, anyone?) This is not an unreasonable amount, consistent with current primary home market valuations and/or in our current inflation regime: the hypothesis seems to add up. You have the resources to pay the note, and lenders are out there willing to underwrite the new loan against the asset. Capisce?
Cash-out refi’s and home equity lines of credit make sense when asset values based in higher market valuations necessitate reconsideration of the leverage the asset is delivering.
Failing to leverage an asset wisely is very poor financial practice. An MBA or CFO of a public company who tries to run a cash business will likely suffer ridicule. The board of directors and stockholders will quickly drive him/them out as irresponsible and naive.
The current bout of (worldwide) inflation was initiated via fiscal policies of increasing the money supply through quantitative easing. That created the conditions that necessitate the refinance of assets belonging to USA Inc. A new cash-out mortgage is the responsible financial instrument necessary to leverage the assets and keep the enterprise going. (Review city of Santa Clarita Budget, 2022-2023, page 63, Part III, “Debt Management Policy” for an exhaustive local civic example.)
In prior instances, the lofty inner roofline was eventually set higher, after congressional representatives had aligned their donors’ wishes with pledges that all efforts would go into assuring that the donor would receive the slices of budget pie promised.
Is there an alternative? Sure, but the pain of fiscal discipline is never borne by the ones doing the negotiation. That numbness is the core of the moral hazard in this debt ceiling (re)negotiation. The brinkmanship is an avoidable, tiresome, boring charade.
Christopher Lucero
Saugus
