The debt ceiling of $14.3 trillion will only last another two to three months at the current rate of government spending. It has been raised seven times in the past half-decade. The newly elected Republican House has some worried that Congress will fail to immediately raise the debt ceiling, at least without debate or other concessions. Along with all the blatant hypocrisy and hysteria surrounding this topic in establishment media and political circles, there’s little attention paid to the consequences of increasing our debt.
“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that “the buck stops here.” Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.”
-President Barak Obama
“If my Republican friends believe that increasing our debt by almost $800 billion today and more than $3 trillion over the last five years is the right thing to do, they should be upfront about it. They should explain why they think more debt is good for the economy.
How can the Republican majority in this Congress explain to their constituents that trillions of dollars in new debt is good for our economy? How can they explain that they think it’s fair to force our children, our grandchildren, our great grandchildren to finance this debt through higher taxes. That’s what it will have to be. Why is it right to increase our nation’s dependence on foreign creditors?
They should explain this. Maybe they can convince the public they’re right. I doubt it. Because most Americans know that increasing debt is the last thing we should be doing. After all, I repeat, the Baby Boomers are about to retire. Under the circumstances, any credible economist would tell you we should be reducing debt, not increasing it. Democrats won’t be making argument to supper this legalization, which will weaken our country. Weaken our county.”
-Senate Majority Leader Harry Reid
“But as the rest of the world copes with the waves of U.S. debt, we are now all in the same leaky boat. There is just so much of our debt other nations want to hold. The more of it they accumulate, the closer we are to the day when they will not want any more. When that happens, slowly or rapidly, our interest rates will go up, the value of their U.S. bonds will drop, and we will all have big problems. We need both more awareness, and more understanding, of this fundamental threat to our economic well being and the global economy. … The President’s budget plans will bring that number to $11.8 trillion at the end of the next 5 years. This is a record of utter disregard for our Nation’s financial future. It is a record of indifference to the price our children and grandchildren will pay to redeem our debt when it comes due. History will not judge this record kindly. My vote against the debt limit increase cannot change the fact that we have incurred this debt already, and will no doubt incur more. It is a statement that I refuse to be associated with the policies that brought us to this point.”
-Vice President Joe Biden
Woops! That’s all from 2006, when the evil George W. Bush was in the White House. The national debt stood at “just” $8 trillion. Democrats were right, but only for partisan reasons. It doesn’t fare much better for the rest of the Senate, either. All the votes for raising the debt ceiling that year were Republican, many of whom recently campaigned as fiscal conservatives against reckless spending. Top that off with all the Democrats voting against raising the ceiling. Count on this year’s vote being an about face for each of those Senators still in office.
Propaganda Minister… um, White House Press Secretary Robert Gibbs was asked about this hypocrisy and wasn’t able to come up with a compelling excuse. “Raising the debt limit was not in question in the outcome” he said several times, only to be reminded that it was barley approved, at 52 to 48. Nevertheless, the media has given Obama and the rest a pass, with almost no mention of this at all on the major networks. Will they be equally kind to Republicans if they vote against raising the debt ceiling?
This hypocrisy is plain and undeniable. The mainstream media isn’t doing its job, again. Politicians, nearly all of them, are more about partisanship than principle. And Americans keep supporting them.
The Size of Our Debt
The national debt just crossed $14 trillion, more than doubling in the last decade. While that’s a frightening number, it’s just a portion of the money government has obligated itself to pay. A visit to the usdebtclock.org website shows the national debt and unfunded liabilities to total in the excess of $126 trillion. Top that off with Fannie and Freddie debt the government has guaranteed, which is several trillion more.
Boston University economics professor Laurence Kotlikoff calculated the fiscal gap, which is money the government has obligated itself to pay yet doesn’t have (projected) revenues to cover, to be $202 trillion (yes, that is two hundred and two trillion dollars).
It is in the interest of the government to minimize the appearance of its debt as much as possible, hence these obligations it has incurred are not portrayed clearly to the average American. When discussed at all, the smaller official national debt is mentioned. The rest is ignored.
No matter which way we look at it, the federal government has promised to pay well over $100 trillion dollars which projected revenues will not cover. The magnitude of these numbers is nearly impossible to comprehend. This video attempts to visualize “just” $1 trillion.
We’re told it would be catastrophic if the debt ceiling isn’t raised. Government would shut down. The sky will fall. Comments from Timothy Geithner, MSMBC host Laurence O’Donnell, and White House Economic Advisor Austan Goolsbee (respectively) are a sufficient sample:
“Never in our history has Congress failed to increase the debt limit when necessary. Failure to raise the limit would precipitate a default by the United States.”
“not doing so [passing an increase in the debt ceiling] is the end of the world as we know it, a world financial calamity that would plunge us into a depression like we’ve never seen”
“I don’t see why anybody’s playing chicken with the debt ceiling… If we get to the point where we damage the full faith and credit of the United States, that would be the first default in history caused purely by insanity.”
Some of this is inaccurate or an exaggeration. It’s also a false choice; there’s a third option.
Failure to raise our debt ceiling means the Treasury can’t borrow more money, forcing the government to limit expenditure levels to revenues. All of the sacrosanct spending projects (that’s just about everything) would probably face cuts.
But defaulting on our creditors, including refusal to pay interest on our debt, is NOT caused by a failure to raise the debt ceiling. The federal government collects over $2 trillion in annual tax revenue, which is far higher than what we pay in interest.
What politicians are saying is they would rather default on our creditors than cut their precious spending and upset special interest groups. They are saying that votes are more important than the “full faith and credit of the United States”.
In reality it is just a threat to avoid making hard decisions. No one wants to face reality, just like the drug addict who can’t stop. Our drug is spending.
Let’s Just Keep Borrowing
Except for the hollow trinity of Waste, Fraud, & Abuse™, we can’t cut spending, we just can’t, can’t, can’t. Fine. Your only responsible choice, then, is raising taxes on everyone by a large margin, possibly doubling taxation for a time. No, we can’t, can’t, can’t do that either. We want to live in Utopia: something for nothing, or at least something at no cost to us (tax the rich!). Darn the law of scarcity!
Many people can’t imagine life in which government lived within its means. Yes you can, and you will. We will either act responsible, and change the way we think about government, or be forced to by collapse of the current system.
The danger is greater than one would think. Recall what happened in the housing bubble, or how quickly Greece got in trouble last year. Interest rates rose. Everything seemed fine until reality hit. The same will happen here. Rates are being suppressed at historic lows and have nowhere to go but up. As we increase our debt and/or inflation, creditors will see us as a greater risk and will demand higher rates, refuse to buy more debt, or even sell it. They will choose to use currencies that hold value.
The loss of our world reserve currency status would be catastrophic from our point of view. We would no longer be able to indirectly tax the world by printing money. Nearly the whole world uses the dollar for one purpose or another. It has been the currency that backed up other currencies. China’s self-inflicted dollar peg forces them to inflate when we inflate. They won’t follow us down that path much longer; the inflation rate there is already getting out of hand. The world has already given plenty of hints and taken some baby steps to moving away from the dollar1. The threat is real, and will catch most people by surprise. When they pull the plug, we’ll have to start pulling our own wagon instead of riding in it while others pull.
Taxation is limited by the people’s willingness to pay; borrowing is limited by the creditors. The third option, printing money, reduces your purchasing power (like a tax) and makes our currency and debt even less attractive to creditors. There’s no way around the law of scarcity. Spending must be cut to levels that we can pay for.
We can’t wait for an economic recovery that’s not coming. Unemployment will remain high for years- the mainstream economists already admit this. America must step out of fantasy land and into the real world: decades living beyond our means is about to come to an end. Most reasonable people have known this will eventually come to pass but will nevertheless have a hard time accepting the fact that it is us, not our grandkids, that will begin reaping the consequences.
It will be futile to look for an easy way out. Prosperity is the product of freedom and hard work, not monetary policy tricks, legislation, or squeezing more money from the wealthy. Our worldviews will need to adjust accordingly.
What Congress Must Do
While the details are certainly up for debate, the general solution isn’t. Congress must immediately begin significant spending cuts and live on the $2+ trillion in taxes it collects. $2 trillion is a lot of money, enough to fund a very big government with lots of handouts. At minimum, the new spending-fighters in Congress must wring out significant concessions from the leadership in the form of large spending cuts and a balanced budget rule (with no exceptions for “emergencies”) before considering one final and smaller raising of the debt ceiling. These cuts will be painful but the sting will only intensify the longer we wait.
Beyond that, we must cut spending further so we can get real tax cuts and allow our economy to grow. We’ll fall far behind the rest of the world if we think an excessive regulatory and taxation burden can exist alongside a flourishing economy. Once upon a time it was the other way around, with the US being one of the freest nations in both an economical and social sense; let’s reclaim that heritage.
Instead of defaulting on our debt, we’ll show creditors that we can stop borrowing, and perhaps someday make good on our debts. With no need to inflate, our currency will stabilize and consumer prices will slowly fall, which will ease the pain during recovery.
What we will Probably Do
Congress is almost certain to go ahead with raising the debt ceiling. They are cowards, too afraid slow down the handout machine- despite the fact that everything will fall apart if they don’t. Congress and the President have more important things to worry about. Petty debt problems wait till later. But later never comes- elections occur every 2 years.
The victory of one like Rand Paul in a state wide office is unusual, indicating it’s possible that voters can see long-term consequences to electing another Santa. Unfortunately, this potential trend might be developing too late.
Factoring all of the above, I am left with no choice but to predict a currency collapse2 and depression within the next ten years. It could happen anytime, this year included; it’s all dependent upon interest rates, which I will not attempt to time. Methinks they will be going up sooner rather than later. If Washington had a real desire to solve these problems, they probably would not have waited till it was this difficult to take corrective action.
Extremely difficult economic times will lead us down a scary path of unrest and a litany of government “solutions”, which will come at a great cost to our liberty and wallet. I can only hope the people will reject that instead of allowing a tyrannical3 government to “save” us. I don’t yet see a reason to be very optimistic.
I can hear the laughter and scorn. “You’ve gone off the deep end, Matthew. Seriously, it could never happen here.” That’s an eerily familiar noise to one of the few men to predict the housing crisis on television well in advance of the bubble bursting. He agrees with my outlook today. It’s realistic- unlike the common spend-spend-spend mentality.
Hypocrisy and propaganda are dominant in Washington since no one wants to make hard and unpopular choices. Yet our massive debt and other economic factors have placed us in a grave situation. By maintaining the status quo and raising the debt ceiling, we heighten the risk for near-future problems including a worst case scenario currency collapse. By not raising the debt ceiling, politicians must embark on the political suicide of massive spending cuts. There is no third option.
It may still be possible to deal with the problems before the problems deal with us, but we are running out of time very quickly. The longer we delay hard choices, the harder they will become.
On a personal level, it would be prudent to ready oneself for these coming problems. It will hit hard and be agonizing for all, especially those who are caught unprepared. The two most important tips are 1).Don’t store your purchasing power in a colander (that’s the dollar) and 2). don’t position yourself where you depend on government checks paying your living expenses.
Cutting spending is not the Grinch’s idea. It’s called utopian-bubble-busting, responsible, long term thinking. We should embrace while we still can.
2. A currency collapse does not necessarily mean there will be hyperinflation, though it is of course a possibility. At the very least, though, it will mean a loss in world reserve currency status and high inflation.
3. Historically, a severe economic crisis creates an environment favorable for the formation of tyrannical governments. Tyranny is defined as unrestrained and oppressive power. More extreme examples are what we might normally associate with tyranny: Hitler, Stalin, or Saddam Hussein; however, absolute tyranny is just that, an extreme. There are lesser forms of tyranny, which are still entirely offensive and dangerous. Thomas Jefferson stated: “To compel a man to subsidize with his taxes the propagation of ideas which he disbelieves and abhors is sinful and tyrannical.” I do not believe my use of that term is hyperbolic in any sense- in fact, we have already become accustomed to acquiescing to tyranny from our present government.
$100 bills: by tobym