Thursday, June 16, 2011

The Debt Ceiling

The big question that needs to be asked is why do we even HAVE a debt ceiling in the first place?  Under the US Constitution and the Separation of Powers, congress controls the purse strings.  That is, every dollar that the Federal Government spends is specifically appropriated in legislation.  Which makes debt ceiling legislation doubly ludicrous.  First, it is congress that 'spent' more money than they had - that money has to be borrowed, so it really seems that the approval for borrowing the necessary funds is implicit in the appropriation itself.  Second, since congress sets the debt limit, it's a little like the man who leaves his wallet in the car when he goes in the mall so he won't spend any  money.  If he decides to buy something, he merely has to walk back to his car to get it.  Likewise, the only entity that can spend money is congress, so imposing a debt limit that they can raise upon themselves is the most pointless kind of charade.

So the debt limit is clearly political grandstanding at it's most worthless and egregious, but we're stuck with it now.  Much like the draconian "Three Strikes" laws, everyone can privately recognize that it's been disastrous, but the political vulnerabilities inherent in coming out for reform or repeal eliminate any hope of a more logical approach to policy.

Historically, when it came time to raise the debt limit, the process was a well rehearsed, carefully choreographed dance.  The party in power would propose to raise the debt limit, whereupon the minority party would take political advantage of the situation to bludgeon their political opponents for being "reckless deficit spenders" who were destroying the promise of America for ensuing generations.  And then, when the time came, they would vote to raise the debt limit.  Because there really is no way to run a modern five trillion dollar Federal Government without the credit markets.  For that matter, there has never been any reason NOT to raise the debt ceiling, as the United States has plenty of capacity to generate the funds necessary to pay all its debts.

There is only one reason why a sovereign default would be a bad thing - interest rates.  All debt instruments are priced according to the current market return plus a "risk premium".  This is why Greek debt is so much more costly than German or American debt - in order to take on that higher level of risk, the creditors insist on a much higher return.  Safe debt = cheap debt.

Now, everyone knows that this is a special case.  The US is not going to default because she is broke - indeed, no one questions our ability to pay.  It is purely and merely a political gridlock problem, where ideological and partisan political differences within the US government have become so polarized and so acrimonious that the political system itself actually created a debt crisis.   So on the one hand, US bondholders don't doubt that they will be paid in full upon maturity, but on the other hand there is no reason to believe that Washington is going to get its political house in order anytime soon.  So based upon an expectation of further political rather than economic dysfunction, as soon as there is a default US debt will be saddled with its own risk premium.  And suddenly, that category down there in the lower right, Debt Service, begins to get larger every year, like another war or another deficit funded tax cut on the wealthy, eating dollars that might otherwise be spent making American's lives better:

Now it's still very much an open question what will happen in this debt ceiling fight.  Once again, the Republicans have put themselves in an impossible position.  Their business, corporate and wealthy investor class base want them to raise the debt ceiling before a default begins to have significant effects on corporate profits.  They're more than happy with the demagoguery, but when the time comes, they expect their employees in the congress to put their ideology in their pocket and, once again, make certain the the torrent of corporate revenues continues to flow unabated.  But this year there is a large contingent of Republicans who danced with the devil - the so-called tea parties - who don't care what they say or what happens necessarily, they only insist that Obama be resisted in all things.  Obama and the Democrats say the debt ceiling MUST be raised or bad things will happen - they must be lying.  The people who make up the core of the tea parties are not educated or sophisticated people.  Instead they are wholly indoctrinated, believing the President of the United States has, as a singular goal, the destruction of the very nation he leads, and that, as Communists, Muslims and/or Homosexuals, the Democrats are lying about everything.  And to these people, ANY vote to raise the debt ceiling, regardless of concessions from the Administration, will be considered a betrayal.

That being the case, there is a large contingent of Republican legislators who will not vote to raise the limit under any circumstances.  Depending upon their actual numbers, at some point Boehner may have to enlist the support of the Democrats in order to successfully capitulate to his corporate paymasters.  If that point comes, we can be certain that there will be negative effects, not only on the American economy, but on the global economy as well.  With growing violence in the middle east, the teetering Greek and Spanish economies and out of control inflation in China, it's only going to take one small shock to send us all back into a major economic depression.  And, of course, we find ourselves being led down this path by a political movement so blinded by ideology they managed to convince themselves that the American people only wanted a Medicare program if they could pay for it.