Ron Paul and the Tea Party are Right – Don’t Raise the Debt Ceiling

Despite the relentless lectures of politicians and pundits, many Americans, including the tea party movement and presidential candidate Ron Paul, don’t want to raise the debt ceiling. In fact, it’s a majority, according to some polls, including Gallup earlier this month:

“Despite agreement among leaders of both sides of the political aisle in Washington that raising the U.S. debt ceiling is necessary, more Americans want their member of Congress to vote against such a bill than for it, 42% vs. 22%, while one-third are unsure.”

Each side utters a mix of truth and falsehoods, but in the end, only one side seems to favor the responsible, economically healthy choice. And it’s not Washington, D.C. and the media (surprise!).

What does Default Mean?

A couple of kinds of default are possible:

  1. Not paying the full interest and/or principal on borrowed money
  2. Not paying off all the promises politicians have made to voters, which can occur in two ways:
    1. Cutting actual payments
    2. Printing money

Most of the hysteria suggests that without raising the debt ceiling, Default #1 will automatically occur. This is completely false. Interest payments consume a fraction of government revenues.

Raise the Debt Ceiling or the Sky Will Fall

The next false choice we are being pounded with is the joke that we must raise the debt ceiling to avoid Armageddon- as if there is no risk to raising the debt ceiling and maintaining the status quo. Meanwhile, those opposing a debt ceiling increase see more borrowing as the real Armageddon.

The truth is there is no painless option. That’s the consequence of the reckless financial behavior that has occurred over many decades. The real resources needed to avoid any type of default do not exist. We did not invest the borrowed resources in things that maintain or increase in value: most of it was consumed or destroyed.

Our Two Choices

We really only have two options facing us:

1. Address the Problem Now. Don’t give politicians more rope to hang our economy with. Force them to return to a sustainable path now, rather than wait till the problem grows and the rest of the world enforces a real debt ceiling by demanding higher interest rates, halting lending, and/or seeking repayment.

2. Kick the Can Down the Road. This is the deal Washington is seeking: raise the debt ceiling again, perhaps coupled with some insignificant spending cuts (from projected increases- there will be no actual cuts). Allow future Congresses to deal with a bigger can down the road.

Each choice has consequences. It won’t be fun. But which is worse?

Consequences: Option #1 (Address the Problem Now)

Dealing with our problems now will be painful in the short term, especially for politicians and special interest groups. There is approximately $200 billion in revenue per month to pay the bills. The bills add up to almost twice that. To bring spending in line with revenue, we’d have to go all the way back to the horse-and-buggy days of 2002.

Closing that gap will require prioritizing the bills. Some will be paid fully, some partially, and some not at all. There is more than enough to fully cover things like interest, social security, and soldier’s pay, if we want.

The consequences will involve shutting down, downsizing, or abolishing many government programs at a fairly rapid pace. The militarism and corporate welfare would need to ended entirely, leaving only real defense- which costs a small fraction of present military spending. Additionally, many domestic programs would need to be reduced or cut. The social “safety” nets could be maintained with some reform.

In the long term, though, prospects are much brighter. We no longer face a growing debt, or the threat of defaults- including a worst case scenario of hyperinflation. The money would no longer need to be devalued by the printing press, so prices would finally stabilize (or slowly fall as productivity improved). The budget would actually be sustainable, rather than transferring wealth from future generations to the present.

Consequences: Option #2 (Kick the Can Down the Road)

Inversely, there is little short term pain in continuing the status quo. However, it’s irresponsible in the extreme to focus on a very narrow time frame and ignore the long term problems. By long term, I mean as little as a year or two.

Those lending money to the US government will worry about it’s ability to repay- as I wrote about in January– and will summarily demand higher, crippling interest rates. If the printing presses are used to fill the gap, high inflation will wreck havoc on the economy. This is indirect and dishonest default. In the worst case a catastrophic hyperinflation will be the result.

If the printing presses are not used, taxes will soar to crippling rates or massive spending cuts will occur. Essentially, we’ll be executing option #1 at a later time when the problem is that much worse.

Lesser of the Evils

We’ll face option #1 now or later, or we’ll have hyperinflation. Hence, addressing the problem now is the only responsible choice at this point.

Easing the Pain

Time is running out. Technically, we’ve already passed the debt limit, thanks to some accounting tricks- unfortunately. However, August 2nd is supposedly the hard deadline. That’s not much time, even if politicians were suddenly and completely persuaded that I’m correct.

I was reluctantly open to a small debt ceiling increase earlier this year, to give a bit of time for solving this problem in an orderly fashion- but I no longer am, for two reasons.

1. I don’t trust politicians to deal with the problem in the future. That’s an old excuse, and they always just end up kicking the can down the road.

2. There are other options:

a. Sell some of the +$1.6 trillion of federal assets.

b. Ron Paul’s idea of cancelling our debt with the federal reserve. I admit to not understanding this one thoroughly enough yet, but it may just be an interesting way to get (another) $1.6 trillion more in time.

Don’t Blame the Messengers- or the Doctor

We should blame the people that created this mess. They are primarily the Presidents and Congresses who spent at reckless, unsustainable levels over the past decades.

We should not blame those who tell us what the problem is- nor those who advocate taking the bad-tasting medicine now before the disease gets even worse.

Interestingly, some would like to cut off government expenditures on those who don’t want to raise the debt ceiling. Others might want to cutoff all welfare payments to close the gap- after all, aren’t these voters most responsible fore supporting reckless politicians? What right do they have to force non-voting future generations to pay for their mistakes? I’d say this attempt to pin blame and punishment on one group is a distraction rather than a solution.

Almost everyone supported those politicians that created this mess though the years. For those that didn’t, well- they could not opt-out. They were still forced to pay taxes, so they deserve to benefit from expenditures as equally as those who supported the government’s actions.

Conclusion

Once again, the bipartisan propaganda is wrong. Don’t raise the debt ceiling. We’ve kicked the can long enough. We’re headed for disaster, but we can still pick between an orderly, responsible, yet painful solution of cutting spending now, or a cataclysmic, out of control non-solution that involves massive defaults or hyperinflation.

In the interest of brevity, I was unable to cover some important related issues. For instance, the US government has defaulted before– and the sky didn’t fall. And it could be defaulting on our debt- that is, not paying it all back (interest and/or principal) would be a good thing in the long term– or at least not the disaster we’re told to expect. Life does go on.

If there is one rule we should all remember, it’s this: Beware of bipartisan consensus. Don’t assume it’s the right philosophy or policy.

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