Wednesday, July 13, 2011

The Farcical "Debt Ceiling Crisis"

If any proof at all were needed that our country is headed off a cliff, it would be the claims and fear-mongering surrounding the announced August 2 deadline to raise what politicians refer to as "the debt ceiling", in order to avoid a "default" on "our country's debt."

I have used all the quotation marks to signal where, in my view, the politicians have it exactly wrong. As usual, they are acting in their own self-interest (trying to ensure they will be re-elected), and not in the country's best interest.

It's time for a refresher: please review my earlier series of posts on "The People's Money." There you will appreciate these points:

"Money" is simply a name for some commodity (real, tangible physical good) that fulfills two basic functions: it is both 1) a neutral medium of exchange (to avoid the inconveniences of barter), and 2) (ideally) a store of value. (The latter is a hard concept to grasp, because money itself has no intrinsic value -- its worth, in the final analysis, is measured only by what one can buy with it -- and that does not include happiness.)

These two functions are inextricably intertwined: as a medium of exchange, money expresses at any given moment the value of any one commodity or service in terms of all others.
Example: If as an attorney, I charge $200 per hour of my time, and if the shoemaker charges $100 for a pair of handmade leather shoes, then in the market I share with the shoemaker, my time of one hour spent as an attorney is worth two pairs of his handmade leather shoes. (If it takes the shoemaker less than one hour to produce two pairs of shoes, then in the market we share, his labor is valued more than mine is.)
Next: viewed as a medium of exchange, the dollar has been a great success. One can travel the world over, and the dollar is instantly recognized in almost every market as a means of purchasing goods in that market.

However, viewed as a store of value, the dollar has been a dismal failure, as graphically conveyed by this picture:

And why is this the case? How can the dollar be such a success at the first function of money, and such a failure at the second, while still being accepted as money?
Answer: Because with the passage of time, America has become less a nation of savers and more a nation of spenders. This is nowhere more true than with our legislators, who are the biggest spenders of all (with other people's money).
When ordinary people spend every dollar they earn almost as fast as they receive it, they fail to notice, over long stretches of time, that their dollars purchase less and less for the same amount (particularly if their earnings are indexed to [go up with] inflation). There are scarcely enough people alive today to remember what a dollar could buy in 1913 -- and they certainly are not a major voting bloc.

But as our legislators spend more and more of money which is not theirs, they have to come up with the money from somewhere. They have just two choices: they can get it either from revenues (income and other taxes, customs duties, fees and the like), or from borrowing. (Since government has turned over the task of creating money to the Federal Reserve, it has no ability to print money on demand, as the Fed does.)

Notice that both of these sources of money for the government come from dollars already printed and in circulation (with one major exception, which I will explain shortly). You can thus think of government spending as akin to a giant vacuum, which sucks dollars out of people's hands, and out of the economy, to be spent as the legislators (and lately the president, too, since the former have abandoned their budgeting function) in their wisdom or folly direct.

The one exception I mentioned is when the government borrows money directly from the Federal Reserve, by selling it Treasury bills, notes, or bonds. In that sole case, the money received from the sale of its debt comes not from somewhere else in the economy, but out of thin air -- or rather, it is created in an electronic instant, with the pressing of a computer key. And when that happens, the supply of money in the economy inevitably goes up -- because there is no one in the entire country who spends their money as fast as the government does (think: millions of dollars per hour).

Every week, the Treasury holds an auction of the various instruments of debt it has decided to sell at that moment, and in that particular market. It is usually a mix of short-, medium- and long-term debt (T-bills, notes, and bonds, respectively), with interest rates set by the results of the auction. And now, here is the kicker: ever since 1957, week in and week out, month in and month out, year in and year out, the total amount of government debt has grown larger and larger, at an accelerating pace (click the graph to enlarge it):

What does the graph mean?

It shows that we have not paid down the national debt by any net amount for the last 54 years. We have been borrowing ever more and more, unceasingly (yes, even when Bill Clinton ran what he called a "surplus" -- see the table at this link). In the course of this spree, we have saddled future generations with more debt in just the last seven years than in the entire first 214 years of our existence.

And you wonder why the bankers are doing so well in the midst of a depression? They thrive on the country's debt -- they make money lending the government's own money to it, and then they make even more money borrowing money from the Fed at practically a zero percent rate and then lending that money still further, at market rates.

Think of it this way: in a country with a fiat (paper) currency, all money is debt. Every single dollar printed and circulating was created by someone's promise to pay -- if not your promise to the bank, or your employer's promise to you, then by the government's promises to the banks and all the rest of us. Our entire economy is based, at bottom, on promises.

The problem is simply this: our promises to pay are not the same as the government's promises to pay. When we promise to pay back a loan, or to pay one of our employees, we can do so only by earning the money through some means connected with our livelihood -- either by working for it, by producing and selling things for it, or by giving up some return on investments for it.

When the government promises to pay us, however (e.g., Social Security benefits when we turn 66), it cannot fulfill that promise except, as explained above, by taking that money from someone else: either it taxes them, as all current payrolls are taxed to pay for the Social Security benefits which government is now paying to retired workers (whose own Social Security withholding long ago was used to pay workers who had retired before them), or it borrows the money from lenders, at interest.

There are two eventual limits on this process: for taxation, there is the Laffer Curve -- the point at which ever higher and higher rates produce lower and lower gross revenues, as people structure their activities and transactions so as to avoid confiscatory taxes; and for borrowing, there is bankruptcy -- the point at which people perceive that you are insolvent, and so stop lending you money, no matter how much interest you promise to pay. The once-great United States of America is now approaching both of these limits.

The current politicians' solution to this crisis? Move even closer to triggering the limits. Continue doing what we have been doing: raise the authorized borrowing ceiling so we can borrow even more, and (for Democrats, at least) raise taxes so we can spend even more.

Raising taxes will simply not stop runaway spending: the debt chart above is proof that, despite all the fluctuations in the tax rates between 1957 and today, borrowing in addition to taxes never stopped, not even for one minute. People who contend that the "rich should pay their fair share" are ignoring that the "share" they want the rich to pay is actually infinitesimal in relation to the total spending. Go back to the Debt Clock page: government spending for the current year is $3.6 trillion and climbing, while the entire fortunes of the wealthiest Americans amount to mere billions. The total value of all privately held assets in the country (business and household) is over $75 trillion, but the total amount of unfunded government liabilities is close to $115 trillion. That means the government could confiscate every single asset owned by every citizen and business in the entire country, and still be committed to pay more than ten times what it is spending each year now, with no means to pay for it!

Do you see now why we are at a breaking point? To postpone the catastrophe that looms ahead will do nothing to alleviate it when it comes, but will just make it that much the worse.

Everyone individually can understand that spending more than one makes is a recipe for disaster -- so why is it so hard to grasp that the same truth applies to our government? (Perhaps because it is hard to understand, when you are a rat, why you might want to stop gnawing at a ship that is leaking. You are just doing what you do, after all.)

Raising taxes is not the solution, and raising the debt ceiling will simply put off the inevitable. So I say: when the Treasury finally runs through all of its fiscal bag of tricks this next August 2, and can no longer create temporary head room by robbing one more pension fund, let it stop borrowing! Let it not sell a single penny more of debt!

The worst thing we will have to endure, if the debt limit is hit, is all the attempts at finger-pointing that will go on, among politicians and in the worthless media, which have done nothing to educate the public about what is coming. (The media reminds me of Job's so-called friends, standing around him and chattering away about what a bad person he must have been to deserve such terrible boils and blisters and disasters.) President and Mrs. Obama will have to cancel a few vacations, and may have to lay off some of their bloated staff. If the President instead keeps his vacation plans and his staff, but stops sending out checks to veterans and to pensioners, then he will finally have made his priorities clear, won't he? And I hope that such clarity will result in his never being elected again to any office of public trust.

Even if we have a "default" (the quotes are there because it will not be a complete default on all outstanding obligations at the same time, but a running one, while the President and the Secretary of the Treasury decide what bills to pay, in what order), there is no guarantee, under our current fiat monetary system as described above, that we will not in a few years, return to the same old bad ways of letting the politicians promise us more in spending than there is actually to spend. But there is a better solution to the problem, which if implemented, would make the government's budget self-regulating. And that will be the subject of the next post.


  1. There are two interesting things about the entitlement programs that make up the bulk of the unfunded liabilities:

    1) They masquerade as "charity" - as if we lowly citizens are the priest and levite who pass on the other side of the road - and the government is the Good Samaritan. However, it isn't "tzedakah" if you're forced by threat of imprisonment and violence to give. (God wants a *cheerful* giver, after all.)

    2) The effect (intent?) of government spending is to make all of us wards of the state. The howling that will arise when the government ceases to send out checks shows that large swathes of the citizens have already become enslaved - it's just that some cages are more gilded than others.

    The net effect is that the two major parties differ only in this: the Republicans bribe the wealthy with their own money - while the Democrats bribe the poor with money from the wealthy. Past government efforts have increased the number of poor - accelerates the spending (since it's not the poor's money in the first place).

    What we've forgotten is that *all* of it is the Lord's. Not only does hw own it, he has allodial title and graciously gives us the opportunity to be stewards of his bounty. We're currently taking it for riotous living or to buy and sell each other.

  2. When they say "default" do they mean specifically not paying the interest on the loans or is it also "default" when salaries or Social Security checks aren't paid on time?

  3. Technically, Perpetua, a default occurs whenever the government does not pay an obligation on its due date. However, if it pays the obligation in full three or four days later, no one is going to run to the courts and sue for "default", which would give them damages equal to just three or four days' interest. So for all practical purposes, if the government keeps paying off its obligations with the money it has coming in, but a week or so late, there will not be a "default", but only an inconvenience.

  4. we are already in "default." maybe not technical default - but if you and i have to take a cash advance on a credit card to pay our other credit cards, we are for all intents and purposes bankrupt. the collectors don't care if you tell them "but my income will rise in the next few years!" till you're blue in the face.

    the way i see it: the only way anyone could ever borrow this amount of money is if they have no intention of paying it back. technical default is inevitable....or.....massive money printing and subsequent inflation, which will allow us to pay back our debts with worthless dollars, but will just cripple the economy.

    the question to me is how long policymakers can kick the can down the road. in other words - it may be entirely possible for us to stave off the real disaster for another generation or two somehow (the previous generations did). if politicians see this as a possibility, they will no doubt pursue that plan.

  5. Mr. Haley,

    A very well done piece, with which I wholeheartedly agree. And your comments in re the "politicians and … the worthless media, which have done nothing to educate the public … standing around him and chattering away" brought immediately to my mind the epithet referring to the journalists and political operatives who see themselves as the arbiters of conventional wisdom—the chattering class.

    We are, I suspect, about to live through an uncomfortable period in American history, what the alleged Chinese curse suggests by living "in interesting times." One can only hope that the reality will serve to educate the electorate (present and future), but I am not holding my breath.

    Pax et bonum,
    Keith Töpfer

  6. Well, I do agree with gltnforpnshmnt. The US government doesn't have the ability to pay off the debt and is not even able to pay the interest and its other current obligations with out borrowing more money. Our country is essentially already bankrupt.