Just as I have predicted for the past couple of years, Congress has capitulated again on its debt ceiling. The media is reporting that Congress is striking a deal with President Obama to lift the debt ceiling once again. The deal now permits the federal government to add even more debt to the already existing mountain of federal debt — that is, until the newest “ceiling” is reached sometime in early 2017 (soon after a new president has been inaugurated), at which point the charade will start over.
Why do I call it a charade? As I pointed out in yesterday’s blog post, “The Debt Ceiling: a Primer,” the debt ceiling represents the maximum amount of debt that the federal government is permitted to incur. Once it reaches that level of debt, it is prohibited from adding any new debt since that would cause it to exceed the debt ceiling limit. If Congress is going to raise the ceiling every time it’s reached, which it has now done 78 times, then what’s the point of having a ceiling?
To amplify what I wrote yesterday, suppose your family has a total annual income of $100,000 and that your annual expenditures, consisting of food, clothing, automobile, movies, books, and sundry things, also total $100,000. Obviously you are saving no money. Everything you are receiving is being spent.
Suppose that four years ago, you and your wife began taking an annual, first-class vacation to Europe costing $20,000. You borrowed the money for the vacations from the bank. Today, your annual income and expenditures are $100,000 but you also owe the bank principle and accrued interest of $90,000.
You are your wife agree that you are incurring too much debt. You decide to place a top limit of $100,000 on the amount of debt you will incur. That’s a debt ceiling. It’s the maximum amount of debt your family will be able to incur.
Suppose you already have signed a contract for another European vacation costing $20,000. That amount will obviously cause you to exceed your debt ceiling. You have three options: (1) Raise your debt ceiling and add to the already existing mountain of debt; or (2) Breach the contract and refuse to pay for the vacation; or (3) Reduce your level of annual spending and use the savings to enable you to go on the vacation without incurring new debt.
Why did Congress impose a debt ceiling in the first place. Because even the big spenders in Congress know what your family knows — that too much debt is not a good thing. In fact, as I pointed out in yesterday’s article, too much debt can be a very dangerous thing. If your family incurs so much debt that you are unable to cover your regular expenditures and the amounts owing on the debt, you are in deep financial trouble. You are staring at bankruptcy.
That’s what even Congress acknowledges with its debt ceiling. The problem though is that each time the debt ceiling is reached, which would ordinarily preclude any new debt, the statists in society scream “The sky will fall in if the debt ceiling isn’t raised again.” The “courageous” members of Congress, who understand that too much debt is very dangerous, always capitulate and raise the ceiling, just as they are doing today.
Even worse, as soon as the debt ceiling is raised, the “crisis” is considered over and the statists tell federal officials, “Just keep spending to your heart’s content even though it means more debt because we can raise the debt ceiling again when it’s reached in a couple of years.”
How much debt does the federal government owe? Go to the website of USdebtclock.org, which gives you a running count of the amount of the federal government’s debt. As I write this, the total amount exceeds $18.4 trillion dollars, but it changes by the second, for the worse.
In today’s budget agreement, the mainstream press is making a big deal over the fact that the agreement calls for some spending reductions on a few programs. That’s irrelevant, however, given the fact that overall federal spending continues to exceed overall federal tax revenues. That means that the money to pay for the deficit must be borrowed, thereby adding more debt to the already existing mountain of debt. According to the U.S. Debt Clock, federal spending totals $3.695 trillion while federal tax revenue totals $3.261 trillion, leaving an approximate annual deficit of $434 billion. That’s the amount that will be added to the already existing mountain of federal debt.
That’s not all. There are what are called “unfunded liabilities,” which include such welfare-state programs as Social Security and Medicare. The amounts to be paid to dole recipients in future years are not listed as part of the national debt because they are not genuine debts but rather welfare payments. That is, theoretically they could be repealed at any time without incurring any liability. Yet, as a practical matter, Social Security and Medicare recipients will demand to be paid their dole over the course of the next several years. So, those unfunded liabilities, as a practical matter, have to be added onto the total amount of the federal debt.
Five years ago, Standard & Poor’s downgraded the U.S. government’s credit rating to one level below AAA, which had been government’s rating for 70 years. Needless to say, federal officials were not amused at this bad news. To send a message to S&P and other bond-rating firms to never do this again, the federal government retaliated against S&P by suing the company for how it rated mortgage bonds during the financial meltdown of 2011.But obviously suppressing the message by killing the messenger doesn’t fix the problem, which is out-of-control spending and borrowing for welfare-warfare state programs.
Of course, all this raises the role of the federal government’s central bank, the Federal Reserve. Ever since it was established, its role has been to provide the federal government with a way to default on its ever-growing mountain of debt by paying it back in cheapened, debased dollars.
After all, let’s face it: this isn’t the first time that the federal government has been incurring massive amounts of debt on an ongoing basis. It’s been doing that ever since the advent of the welfare state in the 1930s and, later, the warfare state in the 1940s.
How the Federal Reserve pulls this off is (by design) a complicated process but essentially what it’s doing is simply printing vast quantities of money that the federal government uses to pay its creditors.
That inflation of the money supply, decade after decade, is why as well as paper bills and notes (i.e., fiat money) and cheapened alloyed coins, rather than coins consisting of gold and silver, are the official money of the federal government. They have printed so much paper and issued so many cheap coins to pay off federal creditors that the good money, even though still technically “legal tender,” was driven out of circulation decades ago.
Obviously the root of all this massive spending and debt is the welfare-warfare state, a type of governmental system that our American ancestors rejected but that modern-day Americans continue to be wedded to. As long as Americans choose to keep these apparatuses grafted onto the federal governmental system, taxes, spending, debt, and monetary debasement will continue to threaten the economic liberty and economic well-being of the American people. This cannot end well. As I wrote yesterday, it would be wise to prepare yourselves and your families for what might prove to be a perfect storm of financial, monetary, and economic crisis and chaos.