Posted on 01/30/2011 5:36:01 PM PST by sickoflibs
At current rates of spending, the federal government may bump up against its debt limit as early as March. Treasury Secretary Timothy Geithner warns that it will be "catastrophic to the economy" if Congress doesn't increase Uncle Sam's credit limit. Writers in conservative outlets call for Republicans to use this opportunity to extract significant spending cuts before extending the limit. And some extreme libertarians argue that the debt ceiling shouldn't be raised, because a government default would be a good thing for the American people.
In this article I'll explain the basic situation and comment on each of these views.
Uncle Sam Has Painted Himself into a Corner Ever since 1917, Congress has allowed the Treasury the discretion to issue new debt (i.e., borrow money from other agencies or individuals). At that time, the thinking was that the executive branch needed the ability to make quick financing decisions to fund the war effort. However, Congress didn't want to completely cede its control of the purse strings, and so it set a cap on how much total debt the Treasury could owe at any given time.
After the first World War, the US government really did sharply slash spending, and in fact the Coolidge administrations retired a sizable portion of the debt. But ever since Herbert Hoover's fateful presidency, the federal debt has mushroomed, and the growth during our financial crisis has been breathtaking:
Currently the statutory debt ceiling is $14.294 trillion. As of January, the actual debt stood at slightly more than $14 trillion. At present rates of spending, and with projected revenues flowing into federal coffers, analysts estimate that the feds will hit their credit limit somewhere between late March to May.
Before continuing with the analysis, we should make an important distinction: The figures above refer to the "total federal debt," which includes "intragovernmental debt." However, when economists discuss things like a given country's "debt-to-GDP ratio," they use a smaller figure, counting only the "total debt held by the public." For the United States, this smaller figure (as of December) was $9.4 trillion, because $4.6 trillion of the debt was actually held by other government agencies such as Social Security.
Whether to include the "intragovernmental debt" in the total figure depends on the context, but to the extent that one doesn't view the Social Security "trust fund" as a genuine asset, then by consistency one also shouldn't get too worked up about the Treasury's obligations to the "trust fund." If the Treasury defaulted on that portion of the debt, what citizens lost in Social Security checks would be offset dollar-for-dollar by reductions in interest payments on the federal debt.
On the other hand, one could argue that there are important differences across individuals — some are counting on Social Security for their retirement, while others have large incomes and pay significant amounts to the IRS to service the federal debt. We shouldn't just lump everyone into a common pool of "citizens." (After all, it would be absurd to argue, "A federal default on all its debt would be a wash, because the group 'all Earthlings' would see counterbalancing gains and losses.")
But if we are going to insist that the Treasury securities held by the Social Security trust fund, and all other intragovernmental debt, are just as legitimate as the Treasury securities held by private investors, then we need to reckon the federal debt as 95 percent of GDP. This is much higher than the figure of about 64 percent that the press commonly reports (using the official third quarter 2010 rate). In other words, the only way to "save" Social Security and other cherished programs — by insisting that we treat their holdings of Treasury debt as legitimate assets — is to simultaneously make the "national debt" that much worse.
The Case for Hysteria
Naturally, Geithner and other spokespeople for the executive branch argue that the world will end if Congress doesn't give them permission to run up more red ink. In particular, they claim that without the ability to borrow from new lenders, the Treasury won't be able to meet its existing obligations, including interest and principal payments on already-existing debt. According to these warnings, it would devastate the world financial markets if the US Treasury defaulted, and so Congress should stop playing politics and raise the debt ceiling like adults.
If Default Is So Bad, Then Don't Default!
Even on their own terms, however, these warnings make a convenient leap from "no increase in the debt ceiling" to "Treasury default." As Michael Tanner points out,
If the debt ceiling is not increased, the Treasury can prioritize interest and debt payment to avoid a default and essentially put the government on a stringent pay-as-you-go basis. Would that involve extreme cuts in government spending? Certainly. But it could be done, if it had to.
Let's remember that the Treasury still rakes in quite a bit of money in revenues — it took in $604 billion (seasonally adjusted) in the third quarter of 2010. In FY 2010 the annual debt service was some $414 billion, working out to an average of about $104 billion per quarter. Although the numbers won't be quite the same going forward, the debt service will soak up only about one-sixth of the incoming revenues.
So there is plenty of cash flow for the Treasury to honor its existing debts, if a default would really be that catastrophic. Also keep in mind that even if the debt ceiling weren't increased, the Treasury could still roll over its debt as existing bonds matured. The only thing the Treasury couldn't do would be to issue more debt.
Maybe Default Wouldn't Be So Bad Anyway
Finally, why take it for granted that a Treasury default would be so awful? As Jeffrey Rogers Hummel argues, there is both a moral and an economic case to be made for repudiating Uncle Sam's debts:
The moral argument for repudiation is easiest to follow although by itself [it] says nothing about the practical results. Treasury securities represent a stream of future tax revenues, and investors have no more just claim to those returns than to any investment in a criminal enterprise. I favor total repudiation of all government debt for the same reason I favor abolition of slavery without compensation to slaveholders.
The economic argument depends on whether Ricardian Equivalence holds.[1] Repudiating government debt eliminates future tax liabilities. To the extent that people correctly anticipate those liabilities, the value of private assets (including human capital) should rise over the long run by the same amount that the value of government securities falls. Thus, people will gain or lose depending how closely their wealth is associated with the State. If on the other hand, people underestimate their future tax liabilities, they suffer from a fiscal or "bond illusion" in which Treasury securities make them feel wealthier than they actually are. Debt repudiation will bring their expectations into closer alignment with reality, which should increase saving.
When I survey students in my classes, most of them claim to have no realistic expectation that social security will be there for them when they retire. If they are being honest, and they act on this belief as they earn income, then Ricardian Equivalence should hold for those liabilities, making any default less painful.
Conclusion
Perhaps the strongest argument for not raising the debt ceiling is that the United States is bound to default — whether explicitly by reneging on payments, or implicitly by massive inflation — at some point anyway in the next decade or two. The government's own projections show the debt quickly rising to alarming levels under certain assumptions, and none of their models deals with the possibility of a continued depression and a collapsing dollar.
As others have noted, a firm debt ceiling would be a "balanced-budget amendment with teeth." Politicians notoriously cannot recommend particular budget cuts for fear of alienating powerful interest groups. But if the newly elected budget "hawks" really wanted to impress us, they could refuse to raise the debt ceiling. Then they and their colleagues would have no choice but to start slashing.
If you realize both parties in Washington think that our money is theirs and you trust them to do the wrong thing, this list is for you.
If you think there is a Santa Claus who is going to get elected in Washington and cut your taxes, spend a few trillion and that will jump-start the economy, this list is not for you.
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The Austrian School’s Commandments plus :From : link
1) You cannot spend your way out of a recession
2) You cannot regulate the economy into oblivion and expect it to function
3) You cannot tax people and businesses to the point of near slavery and expect them to keep producing
4) You cannot create an abundance of money out of thin air without making all that paper worthless
5) The government cannot make up for rising unemployment by just hiring all the out of work people to be bureaucrats or send them unemployment checks forever
6) You cannot live beyond your means indefinitely
7) The economy must actually produce something others are willing to buy
8) Every government bureaucrat should keep the following motto in mind when attempting to influence the economy: “First, do no harm!”
9) Central bank-supported fractional reserve banking is an economically distorting, ethically questionable activity. In particular, no government should ever do anything to save any bank from the full consequences of a bank run, no matter what the short-term consequences.
10) Gold is God’s money.
Add mine:
1) Businesses don't hire workers just because of demand for products or services, they hire because it makes them money. Sorry to have to state the obvious.
2) Government spending without taxing is still redistribution
3) Taking one man's money and giving it to another is not a job.
4) Paul Krugman and Bernake have been wrong about everything, as well as the other best and brightest Keynesian's who have been fixing our economy for over a decade.
5) Republicans in the minority (esp out of the White House) act like Republicans, in the majority they act like Democrats .
It is my opinion that things have gone so far that there isn't any way to peacefully 'go back'.
A collapse is unavoidable.
Prepare now.
Got a little bit of inside info that Congress will raise the debt limit in exchange for something big like healthcare. More forthcoming in a couple of days.
Sooner or later the economy will collapse.
We cannot continue to just raise the limit on our borrowing.
It will be terrible when it happens, but why leave it to our kids to take care of. We need to face the truth now.
It’s as good a time as any.
Well...how will they buy votes and pay off all the labor unions and their pensions?
It would cool to see the response when retired Veterans and Social Security recipriants no longer get their checks.
Catastrophic to the economy? Not even close. Catastrophic to the Democrat's hold on power? Yes.
SHUT IT DOWN !!!
This is where having so many media outlets, the Left still has a great advantage in any confrontation between the GOP and Democrats.
Why even bother to have a debt ceiling anymore it’s become a bad joke. Same old thing time after time then they cut some deals and raise it. The Feds made it easier then ever by monetizing the debt and we all know or should know in a quid pro quo the Fed gets to prop up the stock markets. The longer they pretend just makes the coming collapse so much worse.
It's time for the government to go on a crash diet before the economy of the country it's supposed to serve crashes.
It should last only so long as it may take to pass the legislation to cut entitlements, say six months or less, and if that doesn't happen, let the chips fall where they may.
It's worth a try to avoid collapse and warn the American people of what's imminent as a political row of this magnitude would be very public and heated.
YES. Because we have no plan to cut 40% of our spending right now. Can we cut Social Security pensions by 40%. Do we cut military pensions by 40%. We don’t have a plan yet, so we need to carry the debt a bit further while we work one out.
Isn't it time to quit calling something that mobile a "ceiling?"
Maybe call it the Debt Tent Flap.
>Got a little bit of inside info that Congress will raise the debt limit in exchange for something big like healthcare.<
Like a repeal of health care??
Might actually be worth it
Possibly. I can’t say much because I don’t know much yet. Just got a brief heads up at a social function from our T.E.A. leader. Tuesday evening we get a full report.
hit me with a ping or pm would you? I am really curious.
I mean it, it would almost be worth it.
They would raise the ceiling for a hell of a lot less. And in the long run, it would probably save money, not to mention lives.
The government cannot create jobs. Capitalism creates jobs. And corporations will operate out of the U.S. as long as regulations and corporate tax rates continue to keep operating costs sky high. With business growth in recession, Big Government is spending at record rates while tax revenues are way down. This causes a level of debt that puts the U.S. Dollar in jeopardy. There is a fear that U.S. policy will let the dollar value decline so the relative value of its debt is less. This will raise the price of oil because oil is priced in U.S. Dollars. All hell will break loose if the world ceases to use the U.S. Dollar as the value for their own currency.
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