Raising The Debt Limit: Political Theatre Where The President Could Win And The Nation Lose

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The President just said this:

“This is the United States of America, we’re not some banana republic. This is not a deadbeat nation. We don’t run out on our tab. We’re the world’s bedrock investment, the entire world looks to us to make sure the world economy is stable.  We can’t just not pay our bills.” (For verification purposes, you can hear him utter these words here.)

Maybe the President is just playing to the fears of his audience—fear that the U.S. may be close to financial ruin, or maybe he just doesn’t understand the crisis point facing America next month.

The U.S. IS a deadbeat nation. Its overseas lenders may decide to cease offering more credit if the U.S. shows it never intends to pay down the principle on what the U.S. owes them.  Since borrowed money has become a financial lifeline for America, any interruption in the stream of credit would force the U.S. into an abrupt default on its current and future financial obligations.

According to Reuters news agency:  “The President appealed to business leaders…. to urge Congress to approve an increase in the U.S. debt limit without any conditions attached and avoid a default that is possible as early as mid-October.”

Let’s hope the President isn’t trying to provoke a government shutdown just to pin that failure on the opposing political party.  We would hope he is beyond political maneuvering, though he hasn’t been so far.

The U.S. must currently borrow to meet its obligations to pay for its military, to issue pension checks and to fund Medicare.  If Congress doesn’t vote to raise its own credit (lending) limit, a default may occur.  That means the U.S. may not be able to even pay the interest on its $16.7 trillion of accumulated debt which is about $395 billion a year. (It is borrowing money to do that now).

The President describes the $16.7 trillion accumulated national debt this way:  “Now, this debt ceiling — I just want to remind people in case you haven’t been keeping up — raising the debt ceiling, which has been done over a hundred times, does not increase our debt; it does not somehow promote profligacy.  All it does is it says you got to pay the bills that you’ve already racked up, Congress.  It’s a basic function of making sure that the full faith and credit of the United States is preserved.”

Well, Mr. President, it does increase our debt.  What he is talking about is the official debt limit of ~$16.7 trillion has been frozen while the U.S. trivially cut its rate of spending and borrows from future tax revenues to stay afloat.  So he is saying we aren’t borrowing any more money than what we have already spent (if you can understand that logic).

Nor is the economy growing sufficiently to produce a recovery from the 2008 economic crash. In fact, inflation is out-pacing GDP growth.  (Isn’t inflation actually generating that little bit of that GDP growth?)

The U.S. Treasury has been running a thin cash account for some time now as it only has a day or two of government spending on hand ($17-40 billion).

Bloomberg News quotes U.S. Treasury Secretary Jacob J. Lew to say: “At that point, the United States will have reached the limit of its borrowing authority, and Treasury would be left to fund the government with only the cash we have on hand on any given day. The cash balance at that time is forecast to be about $50 billion, insufficient to cover net expenditures for an extended period of time.”

Few Americans realize the enormous size of the shortfall between annual tax revenues and federal government spending. The generally quoted figure is that the U.S. takes in ~2.4 trillion in taxes and spends something like $3.6-3.8 trillion for a shortfall of ~$1.2-1.4 trillion.  But that shortfall figure only considers the U.S. general fund, not Medicare and Social Security or off-budget military spending, which partially depend on money from the general fund to meet their full obligations.  When these obligations are considered, U.S. federal spending is more like $6.6 trillion, not $3.4-3.6 trillion says noted economist John Williams of Shadowstats.com.

Imagine Congress does vote to expand its own credit limit.  That would be like a derelict spender calling the bank to say he demands the credit limit on his credit cards be raised so he can make the interest payment on his credit card debts.  This is precisely what the U.S. would be doing.

In the interim period while the U.S. debt limit has been officially frozen at ~$16.7 trillion, the U.S. agreed to prioritize payments to foreign lenders even ahead of Social Security payments to pensioners, that is how dependent America has become on borrowed money.  Lenders must be taken care of first.

In reality, expanding the federal credit limit may force foreign lenders to raise interest rates or even cease lending altogether.

Either the U.S. elects to massively cut spending (cut military and Medicare spending in half and measured Social Security cuts) which would dramatically raise unemployment and further plunge tax revenues, or expand the debt limit, which would be a signal for creditors to stop lending, even sell off the existing IOUs (U.S. Treasury notes) at a discount.   There is way out of this box canyon.

Economist John Williams says he anticipates a “dollar sell-off” anytime now (go to the 11;30 minute-mark).  What Williams is saying is if lenders sell off their IOUs for 60-70-80% on the dollar, that would essentially represent a true assessment of the value of U.S. money in international trade — a forced external dollar devaluation that would result in Americans paying more for imported oil and other goods (hyperinflation).

To make matters worse, Congress just threw a monkey wrench into the whole budget mess.  The House of Representatives just voted for a resolution to avert a federal government shutdown but de-funded the President’s cherished Affordable Care Act.  The House passed a resolution to keep the government funded for the first 11 weeks of the fiscal year that ends October 1.  That resolution is not likely to pass in the Senate, but it has the President sparring with the opposing party out in the open.  It’s a rhetorical shoot out.

The President now says this about the opposing political party: “They’re focused on trying to mess with me, not focused on you (the American people)….  They’re actually willing to plunge America into default … we can’t de-fund the Affordable Care Act.”

The President can propose a spending plan, but Congress is in no way obligated to adopt it.  If the President were a king, his wishes would be Congress’ command.  But without pre-selling Congress and lining up votes and expecting Congress to bow to his decrees, the President has now created an unavoidable showdown.

CBS News quotes Deputy Press Secretary Josh Earnest to say: “there were no firm plans for Mr. Obama to meet with congressional leaders, but he told reporters to ‘expect that the President will have conversations with congressional leaders in the days ahead’.”

Recall President Ronald Reagan who, in order to sell his “Reaganomics” to Congress, “devoted most of his time in the spring and early summer of 1981 to building a consensus for his economic recovery program… having drinks with House Speaker Tip O’Neill and a meeting with Senator Edward Kennedy.”

The President appears to want theatre by provoking a government shutdown that he can blame on the opposing party, while Rome burns.

The very reason why the debt limit was frozen and some budget cuts implemented (sequestration) was to show our creditors that we intend to cease reckless borrowing and spending.  The President appears to be oblivious to creditors demands.

The current standoff over the debt limit must be seen in the wake of the President’s unanticipated setbacks in advancing his Affordable Care Act.  The President is still smarting over large employers who reacted to this piece of legislation by implementing employee lay offs and placing full-time workers on part-time status, a backfire reaction that may rob the President of a planned legacy he would leave behind in his 2nd term.

The White House seems to revel in relying upon the TV cameras rather than the telephone to persuade Congress, in a misdirection that could result in financial ruin.  While decrying an impending a financial default he blames on the opposing party, anybody can demand their credit limit be raised and get everyone in their household to vote for it, but that doesn’t mean lenders are going to cooperate. The stakes are high.  Could the President win and America lose?  That appears to be the present course.

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