Tag Archives: debt ceiling

The Insane Use of the Word “Sanity” in the Debt Ceiling Debate

The Debt Ceiling was instituted under President Woodrow Wilson in relation to war spending.

I consider myself, for the most part a fiscal conservative – nothing annoys me more than frivolous government spending (O.K., that is not exactly true – the Twilight movies annoy me more).

Having said that, I do believe there are times when government must spend in order to prevent an economic collapse – we are in such times – what is referred to as a balance sheet recession.

I still don’t like frivolous spending or tax cuts that are just corporate welfare, but the reality is you can’t pass a spending bill on the things you need without adding in frivolous spending perks for the congressional people who lack ethics.

What really bothers me in today’s ongoing debate about our nation’s spending is the complete lack of an actual debate.  The use of the term “fiscal sanity” by any member of congress is simply Orwellian, yet here we are.

What has gotten me up in arms this morning?  Reports that the GOP is considering not raising the debt ceiling and/or shutting down the government:

GOP officials said more than half of their members are prepared to allow default unless Obama agrees to dramatic cuts he has repeatedly said he opposes. Many more members, including some party leaders, are prepared to shut down the government to make their point. House Speaker John Boehner “may need a shutdown just to get it out of their system,” said a top GOP leadership adviser. “We might need to do that for member-management purposes — so they have an endgame and can show their constituents they’re fighting.”

Read more: http://www.politico.com/story/2013/01/behind-the-curtain-house-gop-eyes-default-shutdown-86116.html#ixzz2I3gj6800

If that weren’t bad enough, Speaker Boehner also had the following to say:

“Congress is never going to give up our ability to control the purse. And the fact is that the debt limit ought to be used to bring fiscal sanity to Washington, D.C.,”

House Majority Leader John Boehner

Finally, a Republican Senator got into the act of saying economically frivolous things:

“The coming deadlines will be the next flashpoints in our ongoing fight to bring fiscal sanity to Washington. It may be necessary to partially shut down the government in order to secure the long-term fiscal well being of our country, rather than plod along the path of Greece, Italy and Spain.”

Senator John Cornyn

What exactly are the consequences of not raising the debt ceiling?

Alan Blinder, Professor of Economics and Public Affairs at Princeton University (and former Federal Reserve Vice Chairman) recently penned an article for the Wall Street Journal, The Debt Ceiling Is Scarier Than the Fiscal Cliff in which he said:

Since the federal government has never crashed into the debt ceiling before, nobody knows exactly what will happen if it does. But whatever does happen, it won’t be pretty.

At current rates of spending and taxation, federal receipts cover less than 74% of federal outlays. So if the government hits the debt ceiling at full speed, total outlays—which includes everything from Social Security benefits to soldiers’ pay to interest on the national debt—will have to be trimmed by more than 26% immediately. That amounts to more than 6% of GDP, far more than the fiscal cliff we just avoided.

How in the world could the government cut so much spending so quickly? No one really knows. That is why you hear about dark scenarios wherein the U.S. defaults on the national debt, stops paying tax refunds, delays Social Security checks, leaves soldiers unpaid, and so on. Bad things will surely happen, one of which will be a swift descent into recession. Another will almost certainly be a second ratings downgrade and higher borrowing costs for years, maybe decades, to come.

Before I go back to the two statements by the Boehner and Cornyn in order to make a point that is apolitical – I want to point out that Republicans aren’t the only ones to be foolish on this issue.

As Byron York points out (Once A Critic of Deficits):

“…on March 16, 2006, Obama returned to the same theme — “You don’t have to be a deficit hawk …” — in a sobering floor speech as the Senate considered whether to raise the nation’s debt ceiling from $8.184 trillion to $8.965 trillion. “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure,” Obama said. “It is a sign that the U.S. government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our government’s reckless fiscal policies.”

Obama ended up voting against the Debt Ceiling increase…oops.

Of course, he isn’t the only Democrat, as Byron York in another piece points out (“Actually, Democrats Have Threatened To Hold The Debt Limit Hostage“):

“Obama, Vice President Biden, Democratic Senate leadership Harry Reid, Dick Durbin, Charles Schumer, and Patty Murray — they all voted against it. (the debt ceiling increase)”

“The problem with that argument is that Democrats have indeed, in recent memory, while in the majority, threatened to stop a debt limit increase.  It happened in 2009, when Democrats controlled the Senate and a group of influential lawmakers, led by Sen. Dianne Feinstein,..”

“I will not vote for raising the debt limit without a vehicle to handle this,” Feinstein said at a November 2009 Senate Budget Committee hearing.  “This is our moment.”

Democratic Sen. Evan Bayh agreed.  “There are rare moments of leverage in this institution where you can implement fundamental change,” he said.  “This is one of those moments, we must seize it.” Democratic Sen. Kent Conrad also agreed.  “You rarely do have the leverage to make a fundamental change — a fundamental break from the current trend,” he said.  Democratic Sen. Mark Warner also favored the plan, as did Independent-Democrat Joseph Lieberman.

Perhaps you’ll now be assuaged that I’m not simply picking on the Republican party, were the Democratic party in the minority…they’d be doing the same stupid thing which would illicit the same response from me.

Back to Boehner and Cornyn.

When Boehner says “Congress is never going to give up our ability to control the purse. And the fact is that the debt limit ought to be used to bring fiscal sanity to Washington, D.C.” is he really saying something intelligent?  No, in fact it’s actually an “insane” statement (insane defined as “In a state of mind that prevents normal perception, behavior, or social interaction”).

Granted, to be in congress one must be a little insane, but  Boehner is implying that by taking a stand on the Debt Ceiling he will in essence bring some sort of fiscal restraint to our spending – he is also implying that it is the Debt Ceiling that gives congress the power to spend – he is wrong on both accounts.

First, defaulting on our debt or shutting down the government will actually cost more in the long term and likely plunge the U.S. into a deeper recession (can someone say 1937), in which the government will end up spending MORE money than they would have had they just raised the Debt Ceiling.

Second, all spending originates in the House and Boehner is the leader – meaning he has complete control of what spending comes to the floor to be voted on.  If Boehner wanted to immediately start being “fiscally responsible” he could do so by exercising his Majority power.  The Debt Ceiling does not authorize spending, it authorizes the selling of additional debt to pay for the spending already approved by congress (re-read that).

Congress already voted to spend the money….now they are saying “well, yeah, we voted to spend it, but now we are not going to fund it”….does that sound “sane” to you?

Back to Cornyn, his quote again:

“The coming deadlines will be the next flashpoints in our ongoing fight to bring fiscal sanity to Washington. It may be necessary to partially shut down the government in order to secure the long-term fiscal well being of our country, rather than plod along the path of Greece, Italy and Spain.”

Since when has the GOP been the party of “fiscal sanity” or led any fight against spending (Medicare part D, two wars, Bush tax cuts – not judging, just pointing out the hypocrisy)?

Let me get this straight – in order to not end up like Greece, Italy and Spain….we have to do something that none of those countries has yet done…shutdown the government.  

Does Cornyn really not know that those countries are “users” of a currency and not “issuers” of a currency, as the United States is?

A Senator who doesn’t understand his own monetary system…at least he’s in the majority on something.

The United States is NOT Greece, Italy or Spain – we are sovereign in our own currency and can fund any and all spending.  This isn’t to say that there are no constraints (I’ve posted many, many articles on this – but goto www.pragcap.com for more information), just that we have different constraints.

The debt ceiling debate is not about controlling spending – it never has been, it’s a partisan parlor trick used to hold a nation hostage – both parties do it and it’s getting old.  No wonder congress has such low ratings (you’ll notice I NEVER capitalize the word “congress”).

Any issue that puts me on the same side of Timothy Geithner and Ben Bernanke spooks me a bit, but in this battle they are both right – the Debt Ceiling should be eliminated.

Scott Dauenhauer, CFP, MSFP, AIF

President

Meridian Wealth Management

Scott@meridianwealth.com

 

 

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Hostage Nation: The Debt Ceiling Edition

$1 Trillion Platinum Coin Gets Around Debt Ceiling

Back in July of 2011 I wrote of an interesting idea to prevent the possibility of the US defaulting on its obligations if congress did not vote to increase the debt ceiling.  The idea was to mint a Trillion $ Platinum Coin.

Congress voted to raise the debt ceiling…but  what we got was an agreement for the two parties to form a committee that would jointly find spending cuts with an incentive that if no cuts could be agreed to – automatic cuts would happen to each party’s favorite programs (entitlements and defense).

This agreement was stupid then and is having negative consequences now as these cuts are potentially becoming reality as part of the ongoing “sequestration” talks (cuts were scheduled to go into effect on the first of the year, but the last minute “cliff” deal put it off for two months).

Just like in 2011, today one party has decided that they will use the Debt Ceiling to hold the nation hostage – essentially telling the nation that if spending cuts are not implemented – a vote to raise the debt ceiling will fail.  The specter of the United States defaulting on its obligations is so serious that even its mention could cause panic.

I understand the need to be “fiscally responsible,” however this debate has nothing to do with fiscal responsibility – nothing.  Congress has ALWAYS had the ability to spend less money – they just have chosen not to.  For a congressperson to vote for a spending bill and then not vote to authorize that spending via the issuance of debt is absurd and akin to “being for it before you were against it”.  I’m all up for a debate on spending, but threatening to default if spending cuts are not implemented will crush not only the U.S., but international markets as well – and at a time were recovery is fragile.

I intended on listing why I believe the Debt Ceiling, as a device and law should be removed until I read Cullen Roche’s piece “Explaining the Silliness of the Debt Ceiling and the Platinum Coin to the Rest of the World”.   His view essentially mirrors mine, as follows:

The debt ceiling is a silly rule that only exists in one democratic nation outside of the USA.

Why is it silly?  It’s silly because Congress already debated and voted on the spending that results in the debt issuance.

If Congress wants to reduce spending they should revisit items through the standard legislative process as opposed to holding the US economy hostage once every few months and causing endless uncertainty for the rest of us.

The US government can always harness its banking system to procure funding for future spending (well, 99% of the time and in that 1% of the time when it can’t the Fed will buy the bonds on the primary market, but that’s a different matter and totally different from QE).  The system is designed so the US government can always procure funds.  Auctions, for instance, are literally designed not to fail.  So the USA is not designed like Greece or Spain.  The US government has an inflation constraint, not a solvency constraint.  (See here for more).

Willingly defaulting on US debt by using the debt ceiling as a threat is pure madness.  I can’t think of many things that would be more reckless than this.

The platinum trillion dollar coin, which was first discussed on the internet by MRist Carlos Muchaand then first disseminated by Ramanan, (later by people like me) is a legal workaround the risk of defaulting in which the Treasurer can mint a trillion dollar coin, deposit it at the Fed and effectively allow the US government to cancel $1 trillion of existing debt.  It’s the same as raising the debt ceiling $1T except it cancels outstanding debt as opposed to raising this silly self imposed constraint.

It’s not inflationary since it’s not $1T in new spending, but rather a cancelling of existing debt that the Fed has already taken out of the private sector to begin with.

It’s a silly idea.  It’s an accounting gimmick.  And I absolutely don’t think it should be used.

It’s sad that this is the current state of affairs in American politics.  The fact that we’re fighting stupid ideas with stupider ideas would be funny if it wasn’t so sad.

BUT, if we have to choose between defaulting, which would be catastrophic and implementing a silly accounting trick then the decision is a no-brainer.  It would be unpatriotic to default.  Even more unpatriotic for leaders to allow default when they could mint the coin.

Hopefully there’s a rational way around all of this.  The best suggestion I’ve heard is from Josh Barro at Bloomberg who says we should eliminate the debt ceiling in exchange for closing the coin loophole.  Sounds fair enough to me.

To be clear – minting a platinum coin does NOT get around the debt ceiling, it simply removes the need to add debt, thus breaching the debt ceiling.  The mechanics of it and how the law behind it came about are detailed in the following article on PragCap:

Philip Diehl – Former Head of the US Mint Responds (He helped write the law) at PragCap

The debate about the legality or constitutionality is fierce with opponents and proponents on both sides of the issue.  Barry Ritholz does a good job of summarizing some of the debate in the following blog post:

The Platinum Coin Debate Rages – Presented by The Big Picture’s Barry Ritholz

Even Paul Krugman has gotten into the debate, as follows:

Paul Krugman Gets Into the Act – Be Ready to Mint That Coin

Of course, the funniest take on this has to be Stephen Colbert – I tried to embed the clip, but couldn’t get it to work, so you’ll have to click on the following link – you won’t be disappointed:

Colbert Report – Platinum Coin

The whole debate is disingenuous and destructive not only to the parties involved, but to our economy and securities markets.  There is no reason anyone should have any doubt that the US will not meet its obligations.

If one party wants to limit spending, then don’t vote for bills that create deficits or excess spending – it is really that simple.  Do not vote for spending and then act self-righteous by “taking on” the administration on the spending that YOU voted for.

The Debt Ceiling should be removed (and is likely unconstitutional anyway) and congress should grow up.  You want to have a national debate on spending – let’s have it, but holding the nation hostage is pure gamesmanship and silliness.

As Cullen Roche said “It’s a silly idea.  It’s an accounting gimmick.  And I absolutely don’t think it should be used.  It’s sad that this is the current state of affairs in American politics.  The fact that we’re fighting stupid ideas with stupider ideas would be funny if it wasn’t so sad.  BUT, if we have to choose between defaulting, which would be catastrophic and implementing a silly accounting trick then the decision is a no-brainer.  It would be unpatriotic to default.  Even more unpatriotic for leaders to allow default when they could mint the coin.”

I couldn’t agree more.

Scott Dauenhauer

Scott@Meridianwealth.com

www.Meridianwealth.com

 

 

 

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The Disingenuous Cliff Discussion

Will One Side Blink Before We Get Here?
Will One Side Blink Before We Get Here?

Sick of the “Cliff” yet? Turn on the news and it’s difficult not to hear something related to the ongoing discussions about the expiration of the Bush tax cuts, the auto-cuts to entitlements and defense spending (stemming from the last debt ceiling debate) and the next debt ceiling debate.

If congress (I refuse to capitalize that word) were to not reach a compromise the net effect would be a massive reduction in the federal deficit in fiscal 2013.  The CBO estimates the Federal Deficit would fall by $607 billion, though due feedback mechanisms the actual fall would be about $560 billion (from $1,171 in 2012 to $612 billion in 2013).

CBO Fiscal Cliff Analysis

While some may cheer such a reduction, the likely consequence is recession and a prolonging of the current depression (I still believe the country is mired in a depression as indicated by unemployment, wages and the output gap – despite record corporate earnings).  Some have argued the economy is already in recession (ECRI and John Hussman).

Regardless of your view of the deficit – as evil or as necessary – given that congress has taken to the name “Fiscal Cliff” and acted as if it’s something to be avoided – it would seem to be a net negative from both sides.  Of course, that is an oversimplification (perhaps a gross one).  From my perspective the “Fiscal Cliff” is exactly what is wanted by some in congress.  Both sides actually seem to want to some sort of “cliff” or a “slope” if you will. What do I mean by that?

Both parties want a solution to the “cliff” which means that both parties are actually arguing for a reduction in the federal deficit – the only question is by how much and in what manner.  My point – everyone wants some sort of cliff – though some would prefer a bungy cord or parachute while others would prefer a motorcycle jumping over the Grand Canyon (a spectacular leap followed by an equally spectacular fall).

This country is suffering from a balance sheet recession and it is clear that becoming austere is not a solution (look at Europe).  The country is not going broke (as some continue to say), it can’t.  This doesn’t mean that we can spend forever at any rate and not have consequences, simply that we CAN spend (spending simply meaning running a deficit – which can be done through tax cuts or spending or a combination of both) during certain times that require it and we must do so in order prevent large scale unemployment.

So, if you run into your politician (without a special session you’ll see them in about a week or so) ask them their preference for the cliff – none want to avoid it (that actually would be simple to do) and it’s time they at least admit to it.

Prediction:

I hate short term predictions, they are nothing more than speculative guesses – but my inclination is to think that there will be some cuts to defense, but not large ones, increases in taxes for those earning over $250,000, perhaps an increase in the wage base for social security (with a corresponding permanency or semi-permanency of the current FICA tax).  I’d expect that the deficit won’t fall by $600 billion in Fiscal 2013, but I wouldn’t bet a lot on it.  Compromise is not something this congress does well and the fact is that in this case a compromise is a bad idea.

What will happen with the Debt Ceiling debate is perhaps the real wild card here – after all, it’s partially how we arrived at this current “cliff”.  There are ways around the debt ceiling and if one party decides to hold the nation hostage by not increasing it (see where that got us last time and remember, congress already voted to spend the money) then the administration should go ahead with those work arounds – let the Supreme Court sort it out.

Scott Dauenhauer CFP, MSFP, AIF

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