International Forecaster Weekly

Repeal the Debt Ceiling?

...if the day ever comes when government can't even repay the interest on the National Debt, the illusion of solvency will disappear and the economy will collapse into calamity.

Alfred Adask | September 16, 2017

 The "debt ceiling" is the maximum amount of debt that can be incurred by the U.S. government.  Congress periodically authorizes a higher debt ceiling to allow government to go legally deeper into debt.  

     The problem with the debt ceiling is that lots of American conservatives don't want government to go deeper into debt.  Politicians are therefore forced to seemingly oppose each additional debt ceiling increase or risk being voted out of office.  

Result?  Each debt ceiling cycle is controversial and politically explosive.  If Congress fails to raise the debt ceiling, government can't borrow the currency it needs to pay its bills and/or "service" (pay the interest on) the National Debt.  Failing to raise the debt ceiling would force the government to either admit that it's unable to repay its debts and bankrupt-or, government would have to raise taxes dramatically.  If government admitted it was bankrupt, the U.S. and even global economies could collapse.  If government had to raise taxes, there'd be a political uproar.  In either case, incumbent politicians would risk being voted out of office and forced go back to working for a living.  (The horror!)

     Given the dire consequences following a failure to raise the debt ceiling, you can bet that the debt ceiling will be raised-at least for a little longer.   

     Given that raising the debt ceiling is almost inevitable, you might suppose that that the political process would be simple and painless. You'd be wrong.  

     Although there's little doubt that the debt ceiling must be raised, that increase will raise two political questions:  

     First, when shall the debt ceiling be raised?  

     Congress never wants to raise the debt ceiling during an election year since doing so is sure to antagonize voters and cause some incumbents to be voted out of office. That's why the debt ceiling increase that should've taken place in 2016 was postponed until September 29th of 2017.  

     The strategy is simple: First, get last year's election out of the way so the incumbents can be reelected.  Then, pass a new debt ceiling limit this year so the voters will forget by the time we get to the 2018 mid-term elections.  In broad strokes, that's the preferred time table for raising the debt ceiling.

     Second, how large shall the increase be?   

     The current debt ceiling is about $20 trillion.  If Congress raised the current debt ceiling by another $10 trillion, the public would riot and no member of the Republican Party could claim to be a fiscal conservative in the 2018 election.  

     On the other hand, if Congress raised the current $20 trillion debt ceiling by, say, just $1 trillion, there'd be no public backlash and incumbents will be reelected in 2018.  The trouble with a mere $1 trillion increase is that government will spend that increase in short order and another debt ceiling controversy might occur just before the 2018 election-and no politician wants that.

     The debt ceiling issue really is a darned-if-you-do/darned-if-you-don't political problem  As you'll read, the only politically-rational solution to the debt ceiling problem is to repeal the debt ceiling law and let government borrow as much as it likes, whenever it likes, without a need for congressional approval or congressional liability.  I'm not for that solution, but it does strike me as logical and inevitable.

     Wolf Richter recently penned an article dealing with the debt ceiling entitled "US Gross National Debt to Spike by $800 Billion in October?":   

      "'There is no chance we won't raise the debt ceiling,' swore Senate Majority Leader Mitch McConnell (R., Ky.). He was confident that the Senate would pass a bill that would raise the debt ceiling so that the government could continue to pay for things that Congress told the Government to pay for, and so that the government could service its debts, rather than default on them.

         "Treasury Secretary Steven Mnuchin said, "This is not about spending money.  This is about paying for what we've spent, and we cannot put the credit of the United States on the line."

     If the Debt Ceiling debate is about "paying for what we've spent," it's not simply about "spending [more] money".  It's primarily about repaying some of our existing debt.  

     However, government won't borrow more currency in order to pay off some of the National Debt's $20 trillion principal.  Instead, government will raise the debt ceiling primarily so it can borrow more currency to merely "service" the existing debt by just paying the interest due on that debt.  So long as government is able to "service" the debt (pay the interest), government can sustain the illusion that it can and will someday repay the $20 trillion principal in full.

     But, if the day ever comes when government can't even repay the interest on the National Debt, the illusion of solvency will disappear and the economy will collapse into calamity.

      Moody's credit rating service recently threatened to cut the government's credit rating from its current level of "AAA" if government fails to raise the debt ceiling by September 29th because the resulting failure to pay the interest on the National Debt that's due in October and November.  

     Moody's wouldn't have made that public threat unless there was valid concern that the U.S. government might default on its debt by failing to service that debt (pay just the interest, no principal) in  just the next few months.  Moody's threat implies that government's financial affairs are no better than those of someone who's maxed-out his Master Card and can't even make the minimum monthly payment on the balance due.  The man who can't make the minimum monthly payment will soon lose his credit card, see his credit rating fall, and watch his cost of borrowing (interest rate) rise on any new debt.

     If government can't service the $20 trillion National Debt by merely paying the interest, the national economy is as shaky as the finances of the man who can't make minimum payment on his Master Card. If government must borrow more currency just to pay the interest on its National Debt, then government is about to see it's credit rating plunge and its cost of borrowing (interest) soar.  As government's access to more credit is increasingly inhibited, diminished or even terminated by higher interest rates, we could soon approach a moment when government is forced to admit can't even borrow enough to pay interest on its debts and is therefore bankrupt.

       I don't expect government to fail to raise the debt ceiling so it can borrow more currency in order to pay the interest on the existing debt.  I don't expect government to become an admitted bankrupt this year.

     Nevertheless, my point is that government is so so close to bankruptcy, right now, that it could be forced to publicly admit that it's bankrupt in the first quarter of next year.  

     And, while it's unlikely that government will be forced to admit bankruptcy in the next few months, the fact that it could be forced to do so is evidence that government is already in such enormous financial trouble that a declaration of bankruptcy is virtually inevitable-maybe not this year, but soon.

      If it's true that government is nearly bankrupt, then there are some interesting implications:

      Government can't take on many new programs that require significant additional funding.  I.e., who will pay for a wall between the U.S. and Mexico?

    How much currency can the feds give to Texas for Hurricane Harvey or Florida for Hurricane Irma?  

         Can a bankrupt government continue to subsidize Obamacare?  Or, will Obamacare have to be curtailed or even canceled?  

      Can a bankrupt government continue to project as much military power into the Middle East or the Korean peninsula as it has in the past?  

      If government's ability to project military power into foreign countries is diminished, will the dollar's perceived value and standing as World Reserve Currency also diminish?   

     What about paying government pensions and So-So Security?

     What about paying current government employees' wages?  Can you say "lay-offs" boys and girls?

      What will happen to the perceived value of the U.S. bonds that are being held as collateral by banks for making loans or being held by pension funds as investments?  

      If government is close to an admitted bankruptcy, it'll be desperate for any source of credit or revenue it can find.  That means the chances of cutting taxes on corporations or the middle class are slim and none.  Meaningful tax reform is unlikely.  If government is truly near bankruptcy, expect taxes to rise.

     You can also expect an increasingly aggressive IRS determined to shake down all taxpayers for more loot.

      A (nearly) bankrupt government can be expected to "beg, borrow or steal" as much currency as it can find, wherever it can find it, to sustain the illusion of solvency.  

     Of those three options (begging, borrowing and stealing), begging won't work.  Who loves government enough to give them free currency?  Who respects a government that begs?

     Borrowing is unlikely to work much longer. Who will lend more to the debtor who can't make minimum payments on his Master Card?  Who will lend more to a government that can't even service (pay interest on) its existing debt?  

       Government survived the Great Recession because it was able to force the Federal Reserve to lend it more currency at near-zero interest rates.  Private lenders had largely refused to lend more currency to the U.S. government at artificially low interest rates, so the Fed became the "lender of last resort".

     Without the Fed's "voluntary" purchase of trillions of dollars worth of additional government bonds, government would've expressly or implicitly declared bankruptcy at least five years ago.  Government's dependence on the Fed's "generosity" is evidence that government has been bankrupt for years.

     And now, government is caught in a predicament wherein it's at least doubtful that the Federal Reserve is still willing (assuming it's even able) to increase its already bloated balance sheet by lending as much more currency as the government needs and/or wants.  I doubt that the Fed can refuse to be government's "lender of last resort," but I'll bet that the Fed can drag its feet in order to minimize however much more currency it pays for new U.S. bonds that are certain to be intrinsically-worthless and irredeemable.   

     That leaves "stealing" as a bankrupt government's last resort to acquire more currency.  We can expect that government (just like any other thug who's too broke to purchase more crack in the hood) will mug somebody (or some class of people) to get the currency it needs to maintain its illusion of  solvency and power.  (The moral equivalence between government and thugs is not hyperbole.  A gov'ment's gotta do what a gov'ment's gotta do.)

       So, who can gov'ment rob?  

     During the Great Depression, Willie Sutton was a famous bank robber.  When captured and asked "Why do you rob banks?" Willie replied, "'Cuz that's where the money is."  Willie's observation offered sage advice for thugs and bankrupt governments.  If you gotta have more cash, rob banks 'cuz that's where the money is.

     In the spirit of Willie Sutton, if government truly  goes bankrupt, it will rob American banks (and, perhaps, pension funds) to get the currency it needs to survive.  There's no point to sending soldiers door-to-door to search homes for whatever currency (or gold) has been squirreled away in people's mattresses.  People will scream.  Innocents will be shot.  Sending storm troopers door-to-door would be a public relations nightmare.

     My point is that a governmental bankruptcy (which seems near) is virtually certain to cause government to rob banks, savings and pension accounts.  These thefts are easy because:  1) they can be done electronically; 2) there's no need to send storm troopers to the banks; 3)  no innocent people get shot; 4) better yet, no guilty people get shot. 

      Whenever people can be robbed under the color of law, it'll be legalized theft without the need for much violence.  The P.R. won't be too bad.

     Besides, the public (who, for the most part, have no savings whatsoever) won't mind if government robs the "rich" (those who have even modest savings and pension accounts).  The non-productive American consumers will support and cheer for their bankrupt government's self-righteous authority to rob anyone who's got anything worth having.  ("From each according to their bank accounts; to each according to their crack habit.")  No one will be safe.  But the banks and pension funds will be the low-hanging fruit that's easiest and therefore first to be robbed.


     If you have any wealth that you'd like to preserve, banks and pension funds may not be your first, best choice.

       Let's get back to today's debt ceiling dilemma.  

      The debt ceiling law was originally enacted over a century ago-but that was when our monetary system was based on physical assets-gold and silver.   To protect our assets from excessive governmental debt, Congress passed the debt ceiling law to minimize our National Debt.

     But, today, we have a debt-based monetary system.  As a result, we face a fantastic implication:  Debt (mere promises to pay) has become our primary form of wealth.  

Some readers will reject that implication as moronic-and they might be right.

     But riddle me this:  

     Q:  How did government and/or the Federal Reserve and/or local banks create the economic "stimulus" that prevented a complete economic collapse during the Great Recession?  

     A:  By injecting trillions of dollars worth of fiat currency into the economy.

     Q:  Where'd that fiat currency come from?

     A:  Government printed up trillions of dollars in intrinsically-worthless U.S. bonds (mere promises to pay; debt instruments) and then sold those bonds to the Federal Reserve and to major banks to be held as collateral.  This was possible because Congress, in its infinite wisdom, had previously passed laws that allowed banks to treat worthless U.S. bonds (debts) as collateral (assets) for making additional loans to the people and institutions of the U.S. and global economies.  

     Q:  Why would the world's bankers want these intrinsically-worthless debt-instruments?

     A:  I'm not sure.  I could be wrong.  But the answer may be because, under U.S. fractional reserve banking laws (enacted by the monetary alchemists we've elected to Congress, the Senate and the presidency), made U.S. bonds legally "magical".  That is, although intrinsically-worthless, U.S. bonds can be legally used by banks as collateral to lend up to $9  for every $1 in U.S. bonds held in their bank vaults as legal collateral.  

     For example, suppose a bank paid $1 billion fiat dollars (debt instruments) to purchase $1 billion in U.S. bonds (debt instruments) and parked those bonds in the bank vault. 

      As I understand it, the bank could then lend up to $9 billion to the public to purchase homes, cars and flat-screen TVs.  

     Let's suppose that $9 billion was loaned in the context of Near-Zero interest rates (more monetary alchemy-this time from the Federal Reserve) and the banks could only charge 3% on its $9 billion in loans.  3% doesn't sound like much.  On $9 billion loaned, 3% would only generate about $270 million in interest for the bank.  Figure for inflation, defaults, and the normal costs of business, etc., and lending $9 billion for a mere $270 million doesn't sound very profitable.

     Nevertheless, the banks don't bitch.  In fact, banks are oddly silent about the Fed's near-zero interest rate which seemingly deprives banks of a fair return on their $9 billion in loans.  We could expect banks to scream that they can't survive making a lousy 3% interest on their loans.  But bankers utter nary a sound in criticism or complaint about 3% interest rates.  

     Q:  Why are banks so silent?

     A:  I don't know, but I think it might work like this:  The banks aren't making 3% ($270 million) on their $9 billion in loans.  They're making $270 million in interest on their original investment of $1 billion used to purchase $1 billion worth of "magical" U.S. bonds from which $9 billion in "magic money" loans were "spun".  

     Get that?  If my reasoning is roughly correct, the banks charging a "lousy" 3% on $9 billion in loans are actually receiving $270 million per year on their original $1 billion investment.  Thanks to 9:1 fractional reserve banking, the 3% interest on $9 billion in loaned fiat dollars is really 27% interest on the bank's original investment of $1 billion.

     Q:  If you were a banker able to bring in 27% interest on your investments, would you bitch about how unfair banking laws were-or would you keep your mouth shut and just keep on raking it in?

     A:  Here, I'll lend you my rake for a mere $1 million.

      The modern monetary system is based on debt (mere promises to pay) rather than tangible assets derived from actual production.  Today's monetary system is an illusion, a house of cards, a brilliant Ponzi scheme to rob the productive elements of society by transferring the producers' wealth to parasitical bankers and politicians who understand and exploit the debt-based monetary system.  

     In the context of our former, asset-based monetary system, the debt ceiling law made sense since it protected producers and their assets from excessive governmental debt.  

     However, in our current, debt-based, fractional-reserve monetary system, anything (including the debt ceiling law) that impairs government's capacity to go deeper into debt threatens our financial system and economy.   For our debt-based economy to thrive, we must have more debt and more debtors.  

      If that principal seems absurd, please tell me why we had sub-prime mortgages and masses sub-prime debtors prior to the  Great Recession?  Then, tell me why today, we again have sub-prime auto loans and more sub-prime debtors.  Is the system designed to sell more cars or create more debtors?

     Q:  Why didn't banks learn from the Great Recession that sub-prime loans are dangerous?  Why are banks again engaging in sub-prime auto loans to sub-prime debtors?  

     A:  Because we live in a debt-based monetary system where debt, fantastically, is our principle form of wealth.  To keep this debt-based economy running, either the private sector or  government (or both) must keep going deeper and deeper into debt.  

     If we stop going into debt, the U.S. and global economies will collapse.  Millions might die.


     If we must have more debt and the debt ceiling laws impair the creation of more debt, then (in order to save the "economy") the debt ceiling laws must be repealed.


      The debt ceiling law-which creates a huge and repeated embarrassment for politicians and, worse, impairs government's power to dive deeper into debt-will soon be repealed.  That repeal could come as soon as the first quarter of 2018 or it might be held off until after the 2018 mid-term elections.

     Pending that repeal, government will pass a series of relatively small, short-term debt-ceiling extensions.  Trump and the Democrats have done just that by agreeing to enact a short-term extension of the current debt ceiling from October 29th to the end of December.  Come December, we'll either see another short-term extension or we'll see the debt ceiling law repealed

     Assuming my premises are correct, logic suggests that, for the debt-based monetary system to continue, the debt ceiling law must be repealed.