Here is your weekly roundup of headlines that affect you and your finances. On deck today: WTF is going on with the debt ceiling, a pulse-check on car prices and good news on inflation.
Will Congress Raise the Roof?
As I write this, the debt ceiling debate has not been resolved. Generally, I try to be chill about market fluctuations and recessions. I’m a millennial, right? If we’re not living through a once-in-a-lifetime recession, pandemic, or wildfire season, we probably wouldn’t even know what to do with ourselves! I started my career right in the middle of the Great Recession. Fun fact, my first business was called “Recessionista.” So I know that bad times don’t last forever. But until resolution comes, this debt ceiling debate thing? It sucks.
It feels like our leaders are the parents driving the economy and threatening to turn it around if we don’t stop fighting in the back seat. And the whole country is in the back seat going “We’re not fighting! We’re not fighting!”
I still have a lot of hope that our leadership won’t drive the family car into the ground. But this situation is not ideal and makes me worry about the deeper issues here: that politics are so bad we can’t agree on a national budget.
I want to zoom in today on two little stories that are part of a larger picture. Sometimes looking at little details can help us get a sense of the larger story.
First up: I want to talk about a little piece of the bigger debt ceiling puzzle. Slugs.
Okay, not actually the slimy kind of slugs. I’m talking SLGS, or, State and Local Government Securities. These are a type of treasury only available for purchase by state and local governments.
There are a lot of rules about what state and local governments can do with their money. Obviously, you don’t want your city to just hand all of its funds over to Bob the Investor. The local government must have enough cash on hand to meet their budgetary needs. Beyond that, while Bob could be a careful money manager, he could also spend the city’s money on a yellow Lambo with a matching buttercup Air Force 1s. Nobody wants that… so local governments are legally required to be very careful with their money.
This is true of profits made from the sale of bonds. If a state or local government has extra cash as the result of the sale of tax-exempt bonds they are forbidden to give it to Bob to invest for them. They can only use those profits to buy SLGS. These come in two types: demand deposits (think money market style assets) and fixed deposits (think traditional bonds).
Let’s say your city is going to build a bridge. The government has budgeted the money, collected taxes, sold some bonds, and made a little profit, but they haven’t started the project yet. Your city will use SLGS to invest their money for the project.
… Or they would normally.
Right now the SLGS window, the name for the federal office that issues SLGS, is closed because of the debt ceiling hullabaloo. Now, this has happened before because it’s a way for the federal government to reduce its debt obligations. In the past when the office has had to close, they have honored SLGS that matured during that time, but that’s not guaranteed.
You may be wondering: Nic, why do you keep talking about SLGS? I can’t buy or sell them to make a profit. So why should I care? Because it’s your money! And it’s your bridge! The more difficult this kind of financial transaction is for cities and states, the more likely they are to delay that bridge project or seek other more reliable forms of funding… like taxing you! The SLGS window is just one more cost of the debt ceiling standoff.
But, the SLGS window closure makes sense, because we have the debt ceiling issue dragging the economy down at the same time that the Fed is trying to fight inflation without crashing the economy. That’s not easy. Especially because the Fed only has one tool: interest rate hikes. Now, I know it doesn’t feel like it when you’re in line to pay for groceries, but inflation is easing. But it hasn’t gone away as fast as the Fed, and all of us, would like.
Can We Drive Down Car Prices?
Just as we looked at one little impact of the debt ceiling, now we’re going to look at one little part of the inflation story: the price of cars.
To recap, pre-pandemic, car makers produced more cars than the market really needed. Car dealers made their profits in two ways: 1) by volume, meaning, the number of cars sold or 2) from the interest and fees on financing deals. But then the pandemic hit. Factories shut down, and no one could find enough semiconductors, which resulted in a low supply of new cars. This meant that dealers could charge a lot more. Now instead of making their profit off of volume, they were able to mark up the price of cars by a serious amount. I know this personally. Dealer markups could make up as much as 62% of new car prices through 2022. So that was the “new normal” for a while.
But not anymore. Production is back to normal and many dealers are fully stocked again, some are even overstocked. And yet car prices aren’t dropping very quickly. Except for Tesla…
But for everyone else: what gives? The law of supply and demand teaches us that if there is a greater supply of something then the price should be falling. Prices are down from last year. It is no longer normal to pay thousands of dollars over the asking price. This means that dealers are back to trying to make their profit on volume. Dealers also borrow the money they use to pay for the cars on their lot through what’s called a “floor plan.” Because of higher interest rates, having a fully stocked lot is costing dealers a lot more than it did a year ago. So, dealers want to sell their cars ASAP, so that they can stop paying interest on them. And, they want to sell a ton of cars, so they can make a profit.
To do that, they need to be able to offer incentives and discounts… but automakers, who have a lot of control over pricing, aren’t allowing dealers to do that. As a result, the price of cars has stayed relatively high despite a far more robust supply.
Now unlike SLGS, I’m sure we all can see how car pricing impacts us. But it has one larger unintended consequence. Car prices factor heavily into how the Consumer Price Index (CPI) report, what we use to track inflation, is calculated. April’s CPI numbers are a bit unusual. After months of very low, but steady, inflation, new vehicle pricing fell slightly. Real slightly. Like, 0.2% slightly. Which could be a sign that the rules of supply and demand are finally in effect again. But out of nowhere, the price of used cars, which had been steadily falling for the last 6 months, popped up with an increase of 4.4%. This was enough of a bump that it had an outsized impact on the overall CPI numbers.
This story illustrates that raising interest rates is working. Buyers want cheaper cars because rising interest rates are making loans more expensive… and dealers want to drop prices to sell more cars, because higher interest rates are making it more expensive for them to have a load of cars on their lots.
The buyer and the seller both want a cheaper product, or a product with a less inflated price, as a result of interest rate hikes. The sticking point here is the manufacturer: who is somewhat removed from the interest rate problem and thus still trying to sell cars for as much money as possible.
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