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This article comes from local financial advisor Elliott Orsillo (www.seasoninvestments.com). Elliott's excellent analysis of the history and political realities of the debt ceiling debate is worth perusing. 
Hope this helps you!

The 95th Raising of the Debt Ceiling

Posted on January 15, 2013

“I can confirm we will reach the statutory debt limit today.” – US Treasury Official on December 31, 2012

debt_ceiling.jpgNow that all the political posturing surrounding the fiscal cliff is behind us, it is time for the newly elected Congress to wet their brinkmanship beaks over the debt limit placed on the US Treasury, affectionately known as the debt ceiling. As the opening quote indicates, the US Treasury reached its statutory debt limit at the end of last year. Using “extraordinary measures” and creative accounting, the Treasury thinks it can keep the US government afloat until late February or early March of this year before the debt limit will need to be raised for the 95th time in history to avoid default. 

The whole concept of a debt ceiling is a bit strange in that Congress has the power to set revenues (e.g. tax receipts) and spending, but chooses to outsource the process of issuing debt in order to fill the gap between these two (e.g. the deficit). A somewhat weak parallel can be made to a household which has a known income, the power to set spending, and credit to fill the gap between income and spending, which is extended to them by a bank. At some point, a “debt limit” is reached and banks will no longer extend credit to a household who has built up too much debt and is spending in excess of its income. This is where the analogy breaks down since our fictitious household has no control over raising its debt limit, whereas Congress has complete control over it.

The debt limit was first introduced in 1917 when Congress passed the Second Liberty Bond Act. Before this point, if Congress needed to borrow money to finance a specific plan or project, such as digging a giant canal in Panama, it would approve the sale of a lot of Treasury bonds. Each new lot of bonds was considered individually based on the merit of the need. But with the United States’ entry into the First World War, this process became much too time consuming, so Congress delegated bond issuance to the Treasury Department. The delegation did come with a major caveat which allowed Congress to cap the amount of debt the Treasury could issue by establishing a debt limit.    

Since that time, the debt limit has done very little to control the debt burden of the United States. The chart below plots the debt limit versus outstanding debt on a logarithmic scale. As a brief side note, plotting a logarithmic scale allows us to visualize percentage changes in the debt ceiling over time rather than just absolute dollar changes.


The points on the chart that have the steepest slope are the periods of time where the debt limit was increased the most as measured by the percentage change from the previous debt limit level. We see that the steepest increase was during the FDR administration in the early 40’s, which was followed by a long period of little to no increases. Then in the 1970’s with Nixon taking the US dollar off the gold standard and the embrace of Wimpy economics, the slope of the line turns up again. The slope has roughly remained the same ever since with the exception of the economic and technological boom of the late 1990’s.

It doesn’t take a genius to see that the debt limit is raised once the total outstanding debt either approaches or bumps up against the limit. The raising of the debt limit is a bipartisan practice as well. Since it was established in 1917, it has changed 104 times with 94 raises and 10 declines (although 3 of the declines only lasted for 1 day during political brinkmanship under the Carter administration). Of the 94 increases, 54 have been done under a Republican president and 40 under a Democratic president while the magnitude of the increase has been larger on average under Democrats.


The situation we find ourselves in today is similar to that of 1954 when Republican president Dwight D. Eisenhower butted heads with Democratic senator Harry F. Byrd who chaired the Senate Finance Committee. Eisenhower wanted to raise the debt limit in order to finance the build out of a national highway system. Byrd pushed back stating his concern over the apparent permanency of the national debt that had built up from the Great Depression and World War II. He demanded spending cuts be made in exchange for raising the debt limit. The Treasury had to take emergency measures to avoid default before both sides eventually came to a compromise and raised the limit while also cutting spending.

Not unlike the 1954 debate, the battle over the 95th raising of the debt ceiling has one side stating that it is for the good of the nation while the other believes it is the only tool left in the toolbox to try to reign in government spending. In reference to Congressional Republicans, President Obama stated, “They can act responsibly, and pay America's bills; or they can act irresponsibly, and put America through another economic crisis.” In response, Republican Senate Minority Leader Mitch McConnell fired back by stating that Democrats “need to get serious about spending, and the debt-limit debate is the perfect time for it.” There has even been talks of the Treasury printing a trillion dollar coin, a loophole which exploits the Treasury’s ability to mint commemorative platinum coins, to avoid the debt ceiling. Thankfully this idea has been put to bed, but it just goes to show the extremes our leaders are willing to consider due to the highly partisan and divisive atmosphere in D.C. today.

Needless to say, we are in for another drawn out debate which will be fought in the press and most likely end with a last minute fix. Our view is that this will be accompanied with short bouts of volatility over the upcoming weeks as investors and traders try to digest every tidbit of information they receive from the soon-to-be highly publicized debate. Although we don’t think the debt ceiling debate will be the catalyst that crashes the party, we do realize that there are real, unknown risks in the market that could pop up at any given moment. To quote BlackRock Investments, “the shell you can hear is not the one that hits you.”


elliott_headshot_bw.jpgAuthor Elliott Orsillo, CFA is a founding member of Season Investments and serves on the investment committee overseeing the management of client assets. He spent nearly ten years as a financial analyst and portfolio manager working primarily with institutional clients prior to co-founding Season Investments. Elliott earned a bachelor's degree in Engineering from Oral Roberts University and a master's degree from Stanford University in Management Science & Engineering with an emphasis in Finance. Elliott and his wife Gigi have three children and like to spend their time outdoors enjoying everything the great state of Colorado has to offer.


When Is It Time to Service Your Estate Plan?

Posted on: October 18th, 2012

When Is It Time to Service Your Estate Plan?

If you own a car, then you know it requires regular servicing in order to perform well and be reliable. More than likely, your car came with a recommended schedule for service, based on how many miles it has been driven. After a certain number of miles, you need to change the oil, replace the brake pads, rotate the tires, and so on.

If you have a newer car, you probably have an irritating dash light that comes on when it's time for service and stays on until the mechanic resets it. Either way, whether you pay attention to the odometer or rely on that dash light, it's pretty easy to know when it's time to service your car. And if you keep driving it without servicing it, it's a sure bet your car will let you down.

Like your car, your estate plan needs "servicing" if it is going to perform the way you want when you need it. Your estate plan is a snapshot of you, your family, your assets and the tax laws in effect at the time it was created. All of these change over time, and so should your plan. It is unreasonable to expect the simple will written when you were a newlywed to be effective now that you have a growing family, or now that you are divorced from your spouse, or now that you are retired and have an ever-increasing swarm of grandchildren! Over the course of your lifetime, your estate plan will need check-ups, maintenance, tweaking, maybe even replacing.

So, how do you know when it's time to give your estate plan a check-up? Well, instead of having mileage checkpoints, your estate plan has event checkpoints. Generally, any change in your personal, family, financial or health situation, or a change in the tax laws, could prompt a change in your estate plan. Use the list at the end of this newsletter to guide you.

It's a good idea to review your estate plan every year. Set aside a specific time every year (your birthday, anniversary, family gathering) to review it. Keep these events in mind each time you read through your documents. If you think a change may be in order, don't write on your actual document; contact your attorney. Most changes can be handled by a simple amendment that is attached to your current will or trust.

Planning Tip: Like your car, your estate plan needs regular "servicing." Set aside a specific time every year (your birthday, anniversary, family gathering) to review it. Become familiar with it. Keep it current so it will perform the way you want when you need it.

What Do You Do with Your Estate Plan?
Think for a few moments about what would happen if you became incapacitated or died today. Would your spouse, family and successor trustees know what to do?

Would they know where to find your estate planning and health care documents? Do they know whom should be notified? Do they know what insurance you have and the benefits they can apply for? Do they know what assets you own and where they are located? Do they know who your attorney and accountant are? If you own a business, do they know what to do to keep it operating? Do they know whom to call if they need help?

You don't have to tell your family everything about your assets right now. But it is very important that they know where to find this information when they need it. So, organize it and let someone know where to find it. The point is to try and make things as easy as you can for your loved ones.

Give copies of your signed health care documents to your physician and designated agent. Keep the originals (titles, estate plan, health care documents) in one safe place like a fireproof safe or safe deposit box. (Be sure to add your successor trustee to your safe deposit box so he or she will have easy access.) You may also want to give a copy to your successor trustee; at the least, go over the main provisions with him or her.

Gifting...An Easy and Satisfying Way to Reduce Estate Taxes
If you have a sizeable estate, you may want to consider giving some of your assets now to the people or organizations who will receive them after you die.

Why? First, it can be very satisfying to see the results of your gifts - something you can't do if you hold onto everything until you die. Second, gifting is an excellent way to reduce estate taxes because you are reducing the size of your taxable estate. (Just make sure you don't give away any assets you may need later.) And third, it costs you less in the long run.

One of the easiest ways to gift is through annual tax-free gifts. Each year, you can give up to $13,000 to as many people as you wish. If you are married, you and your spouse together can give $26,000 per recipient per year. (This amount is now tied to inflation and may increase every few years.)

So if, for example, you have two children and five grandchildren, you could give each of them $13,000 and reduce your estate by $91,000 each year - $182,000 if your spouse joins you.

You can also give an unlimited amount for tuition and medical expenses if you make the gifts directly to the educational organization or health care provider. Charitable gifts are also unlimited.

You do not have to give cash. In fact, appreciating assets are usually the best to give, because any future appreciation will also then be out of your estate. For example, if you want to give your son some land worth $52,000, you can give him a $13,000 "interest" in the property each year for four years.

As long as the gift is within these limits, you don't have to report it to Uncle Sam. Just the same, it's a good idea to get appraisals (especially for real estate) and document these gifts in case the IRS later tries to challenge the values. You should do this under the watchful eye of your attorney or tax advisor.

What if you want to give someone more than $13,000? You can, it just starts using up your $1 million federal gift tax exemption. If your gift exceeds the annual tax-free limit, you'll need to let Uncle Sam know by filing an informational gift tax return (Form 709) for the year in which the gift is made. After you have used up your exemption, you'll have to pay a gift tax on any gifts over $13,000 (or whatever the annual tax-free amount is at that time). The gift tax rate is equal to the highest estate tax rate in effect at the time the gift is made. In 2009, it is 45%.

Even though the gift and estate tax rates are the same, it costs you less to make the gift and pay the tax while you are living than it does to wait until after you die and have your estate pay the estate tax. That's because the amount you pay in gift tax is no longer in your taxable estate.

Event Checkpoints for Your Estate Plan

You and Your Spouse

  • You marry, divorce or separate
  • Your or your spouse's health declines
  • Your spouse dies
  • Value of assets changes dramatically
  • Change in business interests
  • You buy real estate in another state
Your Family
  • Birth or adoption
  • Marriage or divorce
  • Finances change
  • Parent/relative becomes dependent on you
  • Minor becomes adult
  • Attitude toward you changes
  • Health declines
  • Family member dies
  • Federal or state tax laws change
  • You plan to move to a different state
  • Your successor trustee, guardian or administrator moves, becomes ill or changes mind
  • You change your mind
Planning Tip: Many people have set up revocable living trusts to avoid the costs, delays and publicity of probate after they die. But all too often they do not change titles of their assets to the name of their trusts. This process is called "funding" the trust. If you have not funded your living trust, you have simply wasted your money. Any assets still titled in your name will have to go through probate - just what you were trying to avoid. Talk to your financial advisor team about funding your living trust right away. And be sure to title new assets in the name of your trust as you acquire them.

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