Wednesday, July 13, 2011

The debt ceiling

Whatever one may think of our form of government, it is by all accounts amusing. The house Republicans, fresh off an electoral shellacking of the other faction of the ruling party, is holding the line on tax increases. This is unusual insofar as the right never holds a hardline on anything, but it is charming, albeit transient. On the other side, President Obama and the Democrats lament that the mean old Republicans refuse to consider tax cuts. The narrative, as always, is that the Democrats are concerned with the poor and the middle class while Republicans only care about millionaires and billionaires. This might pass muster if the President's party hadn't spent the last two years giving trillions of dollars to the likes of Goldman Sachs and J.P. Morgan.

There is some concern that the debt ceiling will not be raised. Coincidentally, this is in accordance with the wishes of the American people. Dutifully, then, the two wings of our ruling party shall come together yet again to raise a symbolic middle finger to the citizenry, whereupon both conservatives and liberals shall blame the mysterious other for the capitulation of their own champions. They will raise the debt ceiling because they always raise the debt ceiling. Kicking the can is the one task the legislative branch seems capable of performing.

Perhaps one should not ignore the chance that the President's egomania and the incompetence of the Congress prevent the ruling class from conspiring against the people. Yet this chance is remote, a point which should not be forgotten as the commentary--and the markets--shall become much more skittish as we approach the twelfth hour, whereupon--miracle of miracles!--a deal will be reached.

It is imperative, we are told, that the government raise the debt ceiling, as to do otherwise would force the U.S. to default--this being deemed irresponsible. The real lack of responsibility is better demonstrated by a government that wages endless wars and runs pyramid schemes, but at this late stage of our republic, rank hypocrisy is scarcely worthy of commentary.

The argument in favor of raising the debt ceiling is patently absurd for at least two reasons. First, since the government has enough money to continue to pay the interest on its debt, default would not occur. Certainly this would require the Congress to re-prioritize so as to avoid stiffing our creditors. Given the character of the Congress, this is a near impossibility; but it could be done, and would be done easily were we not governed by those who possess the restraint of children.

Second, a default becomes more likely, not less, as the U.S. takes on more debt. Given the extent of our unfunded liabilities, $114 trillion at last count, default is inevitable. In that sense, the debate over the debt ceiling is utterly irrelevant, but insofar as the American republic is salvageable, the argument is totally opposed to that made by our representatives in Washington. This only seems strange if, drunk on Keynesian macro-economic theory, we forget that the laws of economics also apply to nations. To put the matter differently, if running up ever higher levels of debt is propitious for a nation, it ought to work similarly for an individual. Here the absurdity becomes manifest: if I have six maxed out credit cards, my situation is not improved by applying for another card. When Congress raises the debt ceiling, they bestow upon themselves another credit card, and make it more likely, not less, that the U.S. will default.

Once they have been given an extended line of credit, Congress will begin to spend more money. To some extent, this will be obligatory, since federal pension funds have already been raided as an accounting trick to allow the government to stumble along until August. The problem, for the Congress--and for us--is that as the U.S. heads towards default, foreigners are becoming disinclined to purchase U.S. treasuries. This will require the Federal Reserve to step in and purchase government debt, though it remains to be seen whether they will do this as part of another round of quantitative easing or whether the Fed will simply debase the currency on the sly. Since Bernanke and his magical printing press are increasingly in the spotlight, it will be difficult for him to hide, but it is nonetheless bad news for anyone who holds U.S. dollars, which is to say, the lot of us.

Since there was no economic recovery, there was no double-dip recession, but I suspect that we will hear the latter term bandied about more frequently as it becomes clear, even to the clueless commentariat, that if the unemployment numbers are ever increasing, we are not in the midst of a recovery.

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