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    In The Dark Of Night – Debt Limit To Be Increased

    by Chris Martenson

    Saturday, December 12, 2009, 2:22 PM

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

      Ludwig Von Mises

It’s time to face facts.  Washington DC is out of control.  Spending is breaking all records, the deficit is climbing higher and higher, and the general populace is voicing graver doubts about the deficit and mounting debts, even as politicians drag the country even deeper into a financial pit.

In 1981, the federal debt first crossed the $1 trillion dollar mark, never to look back.  And now, here in 2009, lawmakers are considering boosting it by as much as $1.9 trillion in one fell swoop, with the hope (fingers crossed) that nobody will notice if they do it over the holidays.  Their calculations in deriving the $1.9 trillion number appear to not involve any considerations about what is best for the long-term fiscal health of the country, but whether the amount will be sufficient to make it past the mid-term elections.

Yes, the debt and deficit are not only large, but embarrassingly large.  And they should be.  Congress should be absolutely ashamed of its role in failing to impart or enforce any regulatory or fiscal discipline. In fact, the entire edifice of power in DC ought to be ashamed.

Sorry, I can’t seem to write about this issue without climbing up on a soapbox.  Let me turn to the facts.

Here’s the data:

Debt Limit to Be Increased By Up to $1.9 Trillion

Dec. 11 (Bloomberg) — House Majority Leader Steny Hoyer said the chamber will vote next week on increasing the U.S. debt limit by $1.8 trillion or $1.9 trillion.

The debt limit increase, raising the legal cap on government borrowing to about $14 trillion, would be the fourth in 18 months. A $1.8 trillion boost would probably be enough to prevent lawmakers from having to raise the limit again before next year’s midterm elections.

Such an increase would be more than twice the size of each of the past three debt limit increases, each of which lifted the cap by $800 billion or less.

We can expect three things here:

  1. Some lawmakers will make blustery noises about how the deficit should be reduced, possibly by attaching “pay as you go” amendments to the bill.
  2. Those amendments will be watered down to the point of uselessness by inserting such ‘outs’ as “unless it’s an emergency” or other such rhetorical escape pods.
  3. The bill to raise the debt ceiling by nearly $2 trillion will comfortably pass by a wide margin.

This is not some genius political insight I am offering here, but merely a summary of the last three debt-limit shenanigans.  Here’s what I read in 2004 when the debt limit was being raised: 

Sen. Judd Gregg (R-N.H.), who will chair the Budget Committee next year, said the measure of his success will be “putting in place a very definitive budget with strong enforcement mechanisms on the discretionary and entitlement [spending] side.”

Of course, no such mechanisms arose in 2004, and neither did they arise in 2006 after a similar pronouncement was made by Gregg, and he’s making the same noises again here in 2009.  Which is not to pick on Gregg, necessarily; there are others providing themselves with the same political cover, but nothing ever seems to result from such apparent concerns, so I tend to doubt their sincerity and view this as political posturing rather than real concern. 

The political strategy surrounding the debt ceiling was laid out very clearly in a piece in Politco:

Democrats to lift debt ceiling by $1.8 trillion, fear 2010 backlash

In a bold but risky year-end strategy, Democrats are preparing to raise the federal debt ceiling by as much as $1.8 trillion before New Year’s rather than have to face the issue again prior to the 2010 elections.

The leadership is betting that it’s better for the party to take its lumps now rather than risk further votes over the coming year. But the enormity of the number could create its own dynamic, much as another debt ceiling fight in 1985 gave rise to the Gramm-Rudman deficit reduction act mandating across-the-board spending cuts nearly 25 years ago.

I am hoping that at least some public debate, if not a full-blown game of political football, erupts over this incredibly large proposed surge in the debt ceiling.  It deserves to be seriously debated and considered. How much is too much?  When will we stop?  If now is not a good time to balance our spending with reality, when will it ever be a good time?

Such questions are now finding their way into the public consciousness, which I am glad to see:

Surplus of worry over national debt

Debt is the essential fuel for a superpower that spends billions of dollars more than it receives in tax revenue — every day. The job of the debt auctioneers is to keep things humming smoothly. It’s a boring process, but maybe not forever. When adjusted for inflation, the United States’ publicly held debt is nearly $8 trillion. That number could more than double in a decade. The projected growth of the federal debt is widely viewed as unsustainable. It’s unlikely that the nation will ever default, but neither is that any longer unthinkable.

Whopper budget deficits for so many years will mean that the cumulative debt will creep up as a percentage of the nation’s gross domestic product (GDP). How much debt the country can handle is debatable. The problem is that, if investors believe the United States isn’t fiscally responsible, they could start demanding much higher interest rates when they bid on Treasury securities. The feedback loop could get ugly. The nation could have to borrow hundreds of billions just to pay interest. This has been touted as a classic path to irreversible national decline.

“Right now, this year, we have 1.6 trillion in debt coming due. That’s roughly twice individual income-tax revenue. Our only plausible strategy for paying that back is to borrow more money,” said Leonard Burman, an economist at Syracuse University.

It has been projected recently by the CBO that the cumulative deficit over the next 10 years will grow by an additional $9 trillion.  I am convinced that that the deficit will almost certainly be higher than $9 trillion and the CBO will have to revise those estimates higher and higher over time (a theme I have consistently noted in past articles such as here).

Here we might note that the budget deficit for November alone came in at a reported $120 billion.

Federal budget deficit for November hits $120.3B

The federal deficit for the first two months of the new budget year is piling up faster than last year’s record imbalance.

Economists worry the flood of red ink could push interest rates higher and raise the cost of borrowing for consumers and businesses, a potential drag on the fragile economic recovery.

The November deficit totaled $120.3 billion, the Treasury Department said Thursday. That’s less than analysts had expected and down from a $176.4 billion imbalance in October. It was a record 14th straight monthly deficit.

Even with the improvement, the deficit is 5.7 percent higher than the first two months of the 2009 budget year when it hit a record $1.42 trillion. The Obama administration expects the 2010 deficit will set a new record at $1.5 trillion.

While this news was largely spun in the media as an improvement over October’s dismal results, the truth of the matter was somewhat obscured by the headline.  Underneath the covers, we saw the government’s receipts fall by -7.7% yr/yr, while outlays were suppressed by a trick related to the accounting of bailout funds.  As a quick comment, isn’t it interesting that the government can report that the economy is growing while federal receipts continue to fall yr/yr?

The real deficit can be easily measured by going to the Treasury website and looking at the increase in the debt held by the public.  That figure stands at $224 billion for the month, and, most intriguingly, shows that the ‘intragovernmental holdings’ (mainly Social Security and Medicare trust funds) fell for the month, indicating that our entitlement programs have become a net drain on the federal budget far earlier than projected (this is really big news, folks).

The debt held by the public represents the additional cash needs of the government for the month, and those were more than $100 billion higher than the reported budget deficit.  While it’s true that there might be some additional funds left kicking around from the Treasury auctions that can spill over into the next month, these are not large enough to foil this statement; the true federal deficit is far larger than is being reported.

The complicating factor for lawmakers this year is that it is an election year and voters have figured out that they’ve pretty much been sold down the river:

Americans Are Furious at Wall Street

Wall Street firms are recovering—but their standing with the American public is not. The public rage directed at Wall Street banks and brokerages remains at high levels, according to a Bloomberg National Poll of 1,000 U.S. adults conducted on Dec. 3-7 by the Des Moines firm Selzer & Co.

Two-thirds of Americans say they have an unfavorable view of financial executives. More than half say big financial companies, which are expected to pay record yearend bonuses, are out only to enrich themselves and also should not have received government aid.

Banks that got taxpayer help through the Troubled Asset Relief Program—the $700 billion financial rescue plan passed by Congress last year—shouldn’t pay any bonuses, according to 75% of those polled. And this includes 39% of respondents who say they disapprove of bonuses even when the banks have paid the government back.

“The fact that they’re even in existence should be bonus enough,” says Cassie Swihart, a 58-year-old retired registered nurse from Warsaw, Ind. Adds Elijah Brown, 42, an unemployed union contractor from California: “Why would you want to give somebody a bonus who put us into this situation?” Brown is among the 64% of people who said bailing out banks was a bad idea.

But this anger goes farther and deeper than a rightful indignation at the offensive bailouts of undeserving banks.  People know that we are on an unsustainable economic path that could end in the financial ruin of the dollar and, by extension, this nation.  To many, this is an unacceptable and unnecessary risk to run.  I’d like to see a couple of surveys done that would ask questions about something besides the banker bailouts.  If they did, perhaps we’d find that the headline could be rewritten as “Americans Are Furious At Congress.”

The bottom line is that a crisis rooted in debt cannot be solved with more debt.  Jim Rogers put it very well recently when he said, “Papering over the problem is not going to solve America’s problem.  The idea you can solve a problem of too much debt and too much consumption with more consumption and more debt defies belief. I cannot believe that grownups would stand there and say that.”

It will be an interesting election cycle, and I am mindful of the idea that there could be some significant upsets at the polls if the current leadership does not appreciate the extent to which we “get it” and wish to see our nation put back on a safe and sound path towards sustainable and true prosperity.

So I will keep a close eye on how the debt-ceiling debates and outcome are managed.  If it turns out to be yet another “in the dark of night” act that gets passed by an embarrassed group of legislators at a moment designed to shield it from public view, then I will take that into consideration when casting my vote.

My strong preference here would be either to reign in federal spending (I have a lot of targets in mind beginning with a ‘defense’ budget that is more than the rest of the world combined) or to raise taxes high enough to cover our wish-list of expenditures.  Don’t get me wrong, I have no desire to see my taxes hiked by 100%.  On the contrary, I am confident that any move to raise taxes by any such amount would rapidly lead to genuine efforts to control spending (or lead to a lot of fired legislators).

This is not a trifling issue.  It is vitally important that we not bequeath our debts to our children.  We need a serious change in attitudes in DC.

“It is incumbent on every generation to pay its own debts as it goes.  A principle which if acted on would save one-half the wars of the world.”

     ~Thomas Jefferson   (to A. L. C. Destutt de Tracy, 1820. FE 10:175)

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