Free Republic
Browse · Search
Topics · Post Article

Skip to comments.

Debt Deal is a Blank Check (Peter Schiff on Budget Control Act)
Safe haven /Europacific Capital ^ | Aug 1, 2011 | Peter Schiff

Posted on 08/04/2011 10:52:19 PM PDT by sickoflibs

By supposedly compromising to raise the debt ceiling, Congress and the President have now paved the way for ever higher levels of federal spending. Although, the nation was spared the trauma of borrowing restrictions, the actual risk of default existed solely in the minds of Washington politicians. But the real crisis is not, nor has it ever been, the debt ceiling. The crisis is the debt itself. Economic Armageddon would not have resulted from failure to raise the ceiling, but it will come because we succeeded in raising it. This outcome falls along the lines that I had forecast (See my commentary, "Don't Be Fooled by Political Posturing" from July 9th).

Both parties are now pretending that the promised cuts in spending outweigh the increase in the debt limit. But the $900 billion in identified cuts are spread over a decade and are skewed toward the end of that period. There are an additional $1.4 trillion in cuts that the plan assumes will be identified by a bi-partisan budget committee. But similarly empowered panels in the past have almost never delivered on their mandates.

More importantly, none of these "cuts" are actually binding. There is plenty of time for future Congresses to reverse what was so laboriously agreed to over the past few weeks. My guess is renewed economic weakness will be used to justify ultimate suspension of the cuts. In addition, most of the spending reductions were already scheduled to take effect before this agreement. So what did we really get?

The Congressional Budget Office currently projects that $9.5 trillion in new debt will have to be issued over the next 10 years. Even if all of the reductions proposed in the deal were to come to pass, which is highly unlikely, that would still leave $7.1 trillion in new debt accumulation by 2021. Our problems have not been solved by a long shot.

Essentially, the structure announced today allows both political parties to talk about reform without actually changing anything. To underscore that point, the deal involves less than $25 billion in immediate cuts! This is less than a rounding error in a $3.8 trillion dollar budget. This is politics as usual.

Even these estimates are based on rosy economic assumptions that have no chance coming to fruition. For example, for the current fiscal year, Washington estimates GDP growth at 4%. But actual growth for the first half of 2011 is below 1%! If our government is over-estimating our current year's growth by a factor of 4, how accurate could their forecasts be ten years into the future? A more honest assessment of likely economic performance would reveal future budget deficits spiraling out of control.

Some might say that the primary goal of this deal was to avoid the dreaded credit rating downgrade. Unfortunately, the deal addresses none of the ratings agencies' stated grievances. If they fail to follow through on their downgrade warnings, the rating agencies will lose whatever credibility they have left. For political reasons, the downgrades may not come right away, but they are inevitable. But as has happened so often in the past, by the time the tardy downgrades arrive, the market will have likely already rendered its verdict.

The debt ceiling itself merely represents a self-imposed limit on US borrowing. Since Congress can vote to raise the limit, its existence has been more of a political nuisance than an actual barrier. The operative factor is not how much we allow ourselves to borrow, but how much our creditors are willing to lend. That type of ceiling can't be raised by an Act of Congress. Once our creditors come to the conclusion that they have lent beyond our capacity to repay, they will be very reluctant to lend more. As trillions in short-term Treasuries mature, the dwindling pool of buyers will demand higher rates of return to compensate them for the risk. But our government is in no condition to afford those higher rates without gutting the rest of the budget.

Last week, it was revealed that despite Obama's warnings that a default would immediately occur if the debt ceiling were not raised, the administration had already agreed to prioritize interest payments to avoid default. Such preferential treatment is only possible because current interest rates are so low and debt service represents only about 10% of total revenue. When the pool of willing lenders evaporates, net interest payments could quickly consume more than 50% of federal revenue. This is particularly true since rising rates will also plunge the economy into a recession that will substantially reduce revenues - even as debt payments surge.

At that point, prioritizing interest payments would mean deep sacrifices in the rest of the federal budget - including Social Security, Medicare, and the Armed Forces. The question then becomes: will US politicians really be willing to take the political heat that would emerge from prioritizing interest payments to foreign creditors over payments to American voters?

I expect that as soon as our creditors decide that they are no longer willing to lend to us at ultra-low rates of interest, we will refuse to repay what they have already lent.

Besides default or major cuts to domestic spending, inflation provides the only other means for the government to deal with this intractable crisis. Because of its political palatability, inflation is, in fact, the most likely outcome. Once we go down that path, we risk high inflation turning into hyperinflation, which would decimate the remainder of our economy. So, as our leaders congratulate themselves for saving the nation, the reality is that they may have just sold it down the river.

TOPICS: Business/Economy; Editorial; Government; News/Current Events
KEYWORDS: debt; deficit; economy; schifflist
The Peter Schiff/Austrian Economics ping. (Washington Bankrupting our Nation by Spending your past, present and future money!)

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 that has some magic easy cure for the economy; someone who is going to get elected in Washington and fix everything just by cutting your taxes, investing (more government spending) a few trillion more we don't have and will never have, and who will just command some countries to lower their prices and others to raise their prices all to suit your best interests, then this list is not for you.

You can read past posts by clicking on : schifflist , I try to tag all relevant threads with the keyword : schifflist.

Ping list pinged by sickoflibs.

To join the ping list: FReepmail sickoflibs with the subject line 'add Schifflist'.

(Stop getting pings by sending the subject line 'drop Schifflist'.)

The Austrian Economics 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 .

Equity bubble rules:

1)If something goes up too fast, it is going down faster,
2) By the time it looks like everybody is getting rich, it’s too late, stay out!
3) To get rich you have to get in early start of recovery and get out at the first really 'bad' news, and ignore the experts that claim that they will stop the next crash(our buddy Bernake.).
4) Don't invest money you will probably need, or worse money you don't really have.

1 posted on 08/04/2011 10:52:23 PM PDT by sickoflibs
[ Post Reply | Private Reply | View Replies]

To: LMAO; DeaconBenjamin; April Lexington; murphE; RipSawyer; Tunehead54; preacher; 1234; coloradan; ...
The Peter Schiff/Austrian Economics ping. (Washington Bankrupting our Nation by Spending your past, present and future money!)
2 posted on 08/04/2011 10:55:32 PM PDT by sickoflibs (If you pay zero Federal income taxes, don't say you are paying your 'fair share')
[ Post Reply | Private Reply | To 1 | View Replies]

To: sickoflibs
Peter Schiff is invariably excellent.

This is the most concise, and I feel, the most accurate walk-through of our inevitable path toward the Collectivist enabled path to fiscal Armageddon.

As Schiff concludes, because of political expediency and cowardice, it is going to be inflation, probably hyperinflation, among other nastiness.

3 posted on 08/04/2011 11:08:01 PM PDT by EyeGuy (2012: When the Levee Breaks)
[ Post Reply | Private Reply | To 1 | View Replies]

To: EyeGuy

You can’t have inflation with high unemployment. When you lose your job expenses are cut. Deflation kicks in and no matter how low the price goes no one buys. No job and huge debt = disaster.

4 posted on 08/04/2011 11:17:02 PM PDT by Orange1998
[ Post Reply | Private Reply | To 3 | View Replies]

To: Orange1998

While you are technically correct about the push towards deflation he still makes a strong argument for inflation. When the government debt is big enough they will have to monetize it. It’s the cowards way out since they seem so incapable of making real cuts. Unemployment won’t make much impact when the price of full employment pales in comparison to the debt.

Right now we seem to have both and it’s a mixed bag but nobody has ever dealt with numbers like this. It is incomprehensible. It was unthinkable to contemplate these numbers a few decades ago and that by itself is inflation.

5 posted on 08/05/2011 12:09:18 AM PDT by volunbeer (Keep the dope, we'll make the change in 2012!)
[ Post Reply | Private Reply | To 4 | View Replies]

To: sickoflibs

Dow Futures Minus 143

6 posted on 08/05/2011 12:22:28 AM PDT by TomasUSMC ( FIGHT LIKE WW2, FINISH LIKE WW2. FIGHT LIKE NAM, FINISH LIKE NAM)
[ Post Reply | Private Reply | To 1 | View Replies]

To: Orange1998
Surviving Inflationary Depression
7 posted on 08/05/2011 12:30:57 AM PDT by blam
[ Post Reply | Private Reply | To 4 | View Replies]

To: sickoflibs


Could you add me to your ping list?

8 posted on 08/05/2011 8:56:28 AM PDT by CPT Clay (Pick up your weapon and follow me.)
[ Post Reply | Private Reply | To 1 | View Replies]

To: blam

Well, she outlined the disaster scenario, but I really didn’t see much in there about how to prepare. I don’t think anyone really knows what to do.

9 posted on 08/05/2011 9:29:03 AM PDT by Pining_4_TX ( The state is the great fiction by which everybody seeks to live at the expense of everybody else. ~)
[ Post Reply | Private Reply | To 7 | View Replies]

To: Orange1998
You can’t have inflation with high unemployment.

Where were you in the 1970s? Or did you forget your /sarc tag?

Are they really teaching such nonsense anymore? I suppose you could create a model that suggests such a thing, but history clearly shows that it can happen.

The economists had to invent a new term for this - Stagflation, coined in 1965.

So for 45 years, the economists have known that such a thing is possible.

10 posted on 08/05/2011 2:24:45 PM PDT by slowhandluke (It's hard to be cynical enough in this age.)
[ Post Reply | Private Reply | To 4 | View Replies]

To: Orange1998
"You can’t have inflation with high unemployment. When you lose your job expenses are cut. Deflation kicks in and no matter how low the price goes no one buys. No job and huge debt = disaster."

Keynes lied, and the economy died. Inflation is supposed to cure unemployment by lowering real wages. Of course, it really doesn't work like that because increases in wages and CPI always lag PPI when loose money is used to try and gin-up GDP numbers. That's why things in the US got as bad as they did back in the 1970s.

The inflation we're experiencing is a monetary phenomenon combined with rising GLOBAL demand. It's a small world after all. Even smaller now that the Chinese are putting more new automobiles on the road on an annual basis than we are.

What's been happening for the last decade plus is that the basic inputs used to produce literally everything are going through the roof. US consumer demand for end products is a non-factor. When prices for inputs go up, consumer prices must follow or those products cannot be produced and sold at a profit. If consumer prices cannot rise due to slack demand, then margins start to collapse and businesses start laying off. It's textbook stagflation and supply shock from an Austrian point-of-view.

Deflation's not kicking in because there's too much liquidity sloshing around in the upper end of commodity markets, and there's too much added demand outside our borders thanks to the recent economic expansion around the Pacific.

Some modest deflation in basic inputs would be welcome relief for our manufacturing sector, but the Fed are seemingly clueless about the real-world reprocussions of their loose-money policy and are actively preventing recovery by pricing us out of input markets. Holding PPI as close to 0% as possible should be the Fed's only mandate.
11 posted on 08/05/2011 6:48:29 PM PDT by CowboyJay
[ Post Reply | Private Reply | To 4 | View Replies]

To: slowhandluke
A model has already been created "Phillips Curve". In the short run the Phillips Curve correctly applies. Don't worry Bernanke monetary policy will make you proud in the long run.
12 posted on 08/05/2011 7:30:02 PM PDT by Orange1998
[ Post Reply | Private Reply | To 10 | View Replies]

To: sickoflibs
As one poster within this thread indicated to another...where where you in the 70's? I seem to have not forgotten the 18% plus interest rates, while we had high un-employment. I take all these folks scenarios with a grain of salt.
One thing is for sure. The Russians and Chinese will take full advantage of the situation as is beginning to show over the past half year... in demanding a new world currency be set up. We are shit out of luck at this point.
13 posted on 08/06/2011 1:44:18 PM PDT by Marine_Uncle (Honor must be earned....Duncan Hunter Sr. for POTUS.)
[ Post Reply | Private Reply | To 2 | View Replies]

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.

Free Republic
Browse · Search
Topics · Post Article

FreeRepublic, LLC, PO BOX 9771, FRESNO, CA 93794 is powered by software copyright 2000-2008 John Robinson