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Thursday, January 27, 2011

Just Say No To Debt Ceiling Increase

This is one of the most important posts that I will ever write. I don't say that lightly because over the years I have spilled a lot of electronic ink on a lot of different subjects. This one has been building for awhile and it's time for me to unleash it.

The Unites States will soon be bumping up against the statutory limit of the debt ceiling. For those of you in Rio Linda(as Rush likes to say), this means that the United States Treasury can't float bonds over and above a limit set by a law passed by Congress.

Let's go over some numbers and some simple math. I like to say that "math doesn't lie" and it's true. Currently(as of 2010), the United States takes in $2.2 trillion dollars in revenue and spent $3.5 trillion. This means that the US government must borrow the difference of $1.3 trillion($2.2 trillion minus $3.5 trillion = we are deep S***).

If we don't pass a debt limit increase, the Congress will be forced to live within its means(i.e spend only what comes in and nothing more). It would be like passing a balanced budget amendment. The deficit spending would end immediately.

You and I both know that this scenario will never happen. Congress will pass a new increase in the debt limit despite the rhetoric coming out of the new GOP majority. Am I skeptical? You bet I am. I know the track record of all these idiots in both parties. Past performance is indicative of future results.

Some have said that if we don't pass an increase in the debt limit that we would "risk the full and faith and credit of the United States". Bullshit. We are still taking in $2.2 trillion in taxes and various revenue that flows into the Treasury. What would have to happen though is that every line item in the budget would have to get cut by 37%. That's right....37%! Medicare would get cut 37%. Patients would have to make up the difference to doctors. Social Security would get cut 37%. Retirees would see their monthly paychecks get cut by 37%. Spending on defense, foreign aid, FBI, Homeland Security, and all discretionary programs would have to take a 37% whack.

Do you see this actually happening? No way Jose.

My friend John Reed had this to say....

Opponents of not raising the ceiling say the world would lose faith in U.S. government promises if the government reneged on Social Security, etc.

They should. Those bogus promises were made by politicians playing Santa Claus with taxpayers' money. There is literally not enough money in the world to pay Social Security, federal pensions, medical care benefits and so forth that have been promised by federal politicians.

The net worth of the world is minus $34 trillion. The gross domestic product of the entire world is $70 trillion. The unfunded liability (money we should have put in the bank but did not) for Social Security and Medicare alone was $107 trillion in 2008. There is no hope that we can ever pay that.

Would a recovery and unemployment going down to 5% solve the problem? Not even close. That would only increase annual tax revenues by about $150 billion.

Would tax increases solve the problem? Not even close. Numerous experts like Former Fed Chairman Alan Greenspan have said that. If you could increase taxes 25%, which is probably impossible unless you broadened the base (made the 50% of Americans who no longer pay any tax other than Social Security tax start paying income tax), you would still only get about $500 billion more revenue. Not enough.

Selling all the national parks and federal buildings like the Smithsonian? Not even a dent.

If the U.S. continued to make on-time payments to bond owners, the "full faith and credit" of the U.S. would not be adversely affected. Indeed, I suspect the world bond market would feel relieved that the U.S. government was finally getting serious about living within its means and behaving in a way that will likely result in bond holders being paid back as promised.

No doubt, liberal politicians will say that seniors and the sick should take precedence over bond holders.

Okay. Go with that. But understand it takes you to the same place very rapidly. If the U.S. government defaults on the bonds instead of the Social Security and other federal entitlements, the world bond market will instantaneously impose their own debt ceiling. That is, they will refuse to buy any more U.S. bonds. In other words, defaulting on the bond payments would change the U.S. government's credit from AAA to defaulted. To put it in laymen's terms, the credit card of the Congress and the President would be cut to pieces and canceled.

The "full faith and credit" of the U.S. government would, in that case, indeed, be destroyed.

If and when the world bond market, which mainly consists of U.S. citizens and institutions, stops buying U.S. bonds, those same cuts I described above will have to take place immediately. Basically, there are two entities that can shut down the U.S. government selling bonds and engaging thereby in deficit spending:

• Congress and the President voluntarily
• the world bond market involuntarily

Same result no matter who initiates it.

Furthermore, remember the refinancing of maturing U.S. bonds I described above will also not happen if the bond market stops buying our bonds. In other words, we would have to pay off the $3.5 trillion of bonds that were due this year and we would only have $2.2 trillion of tax revenues to do it. And we could only use that $2.2 trillion to pay off maturing bonds if we totally shut down the entire U.S. government. Even if we did that, we would still have to default on the deficit spending—$1.3 trillion—portion of the maturing bonds because we would not be able to sell the bonds or collect the taxes needed to pay them.

This is a hell of a mess, isn't it? Your elected officials have been building this mess since 1930—both parties albeit more the Democrats.

So what is probably going to happen?

On January 25th, Obama, Paul Ryan, and Michelle Bachman all delivered State of the Union addresses. Obama promised more of the same, calling spending on Democrat pet projects like green jobs "investment." His concessions—three-year freeze on non-defense, discretionary spending except where union contracts exist, cutting back on the requirement to issue tons of 1099s, vetoing earmarks, were all symbolic trivia, no substance.

Ryan said the right things but almost in Federal Reserve code that only an expert on fiscal and monetary policy would truly understand. Bachman gave the best of the three talks with a more militant Tea Party list of plans,. Like Ryan, she was truthful, but failed to tell audiences exactly what it all meant because if she had there would be demonstrations in the streets today.

Surprisingly, the best State of the Union Speech on the 25th was made by John Stossel on Fox Business. He even had a little presidential podium only it said Stossel instead of The President of the United States. He also entered the room shaking everyone’s hand and had lots of flags. But after a pause, he began his speech with, "We're in DEEP trouble."

Stossel said almost exactly what I am saying about what has to be done. But it's not going to happen.

They will probably vote to raise the ceiling. Republicans will probably demand some token spending cuts from the Democrats. They will probably refuse most of them. That will result in the debt ceiling arriving and the government not being able to sell bonds because refusing to vote on the ceiling is the same as voting against it.

During that post-hitting-the-ceiling period, Democrats will probably try to reprise the Clinton-era trick of saying the "Republicans shut down the government." It worked for them back then. I doubt it would work again. If two sides do not agree, you cannot logically blame the lack of agreement to either side. Each side can explain their position and the public can decide which is more reasonable.

Both parties are guilty of succumbing to forgetting their campaign promises and going along with business as usual when they get to Washington. Republican House Speaker John Boehner called voting for the debt-ceiling increase "being adults" and Republican "strategist" David Winston called voting to increase the debt ceiling "governing." Call it what it is: kicking the can down the road—again, stealing from our children and grandchildren, and making sure we have to do "nine" when a "stitch in time" would have saved them. Criminal careerism gets more to the heart of it.

Ultimately, they will all get together and raise the ceiling with some meaninglessly small cuts. If it's not a trillion or more, that means the situation is still deteriorating.

Then the media will start discussing when we will hit our next debt ceiling. Once again, everything I said above will apply only the cuts required to match outlays with tax revenues will be bigger.

In other words, the choice is not 37% cuts now or more borrowing. It is 37% cuts now or bigger cuts next year or even bigger cuts the year after that, etc. etc.

37% is the best offer the American people are ever going to get. And they will almost certainly haughtily reject it.

Congress and the president will not vote to cut federal spending 37%. When they have to choose between personal political suicide or national financial suicide, they will choose national financial suicide. That means we will be hit with bigger cuts in the future.

There is no grown-up in Washington or on Wall Street looking out for you. You have to be your own grown-up.

But the vast majority of Americans are behaving exactly as if they believed some Washington/Wall Street grown-up were taking care of them.