Debt Crisis Yawner

Again with the default talk and the manufactured panic, all to convince the American people to further rob their grandkids to pay for current services.  As I noted in a previous post, a default is when you fail to pay the interest on your debts, not when you stop paying for current services.  The government can layoff several departments worth of employees and that isn't default; that's economizing.  As George Will noted, "Default is a choice."  The government need merely service the debt in order to maintain the full faith and credit of the US.  That is about 10% of the budget...  er... continuing resolution (we don't do budgets anymore despite US law that requires them).  If the debt ceiling is not raised, that puts the ball in Obama's court to pick and choose how the incoming revenues are disbursed.  He would have to CHOOSE to default.  Sadly, I wouldn't put it past him.  He has actually spent shutdown budget repeatedly blocking off National Mall.

The Republicans might be on to something with the shutdown and the debt crisis.  They have long claimed to be the party of small government (disingenuously) and this gives them the opportunity to achieve that.  Failing to raise the debt ceiling will force government to spend within its means and the shutdown can be made permanent.  Heck, the government is still 83% open, hardly a shutdown.

Of note, neither party wants to diminish the power of the Federal Government.  A sizable minority of Republicans - the Tea Party Caucus - have the party over a barrel.  Boehner cannot pass anything without their approval unless he does so with Democratic votes.  Such a move breaks the Republican caucus in half and ends his speakership.  Much as the rest of the Republicans hate that, they understand that to ostracize the Tea Partiers is to cripple their majority.

Back to the Debt Limit, imagine what the last 5 years growth would have been like had it not been raised.  Six trillion dollars of borrowed money would not have inflated the growth numbers.  Consider that gross domestic product (GDP) is defined as follows:

C + I + G + (X - M)

That is, Consumption + Investment + Government + (eXports - iMports).  Note that government spending is reckoned in the figures.  Thus, by borrowing all that money, the government goosed the numbers.  Consider if I took out a $100,000 loan this year and counted that as income.  Wow, this would be a really great year.  That is what the government does every year.  And even so, our growth has been pathetic, hovering at 2%.  Cutoff the borrowing and the truth will out.  Almost everyone in Washington is afraid of the truth.

"Fool me once, shame on you; fool me twice, shame on me; fool me for five years, I'm an Obama voter."

The quote is from Charlie Martin.  Here's a link to the article:

http://pjmedia.com/tatler/2013/10/14/i-told-you-so-obamacare-edition/

Credit Card Mathematics

Let's suppose I have a credit card.  I have a $10,000 limit on my credit card.  Now, I make a minimum payment each month, which is a small fraction of what I have charged.  However, month after month, the amount I am carrying on the credit card is rising until it finally hits my $10,000 limit.  Now, if I try to charge anything else on that card, it will be refused.  Have I defaulted on my credit card?  Have I defaulted on all my bills unless I can somehow convince the credit card company to raise my limit?  No, obviously not.  I just can't continue to spend beyond my means any longer.

That is the same situation of the Federal Government.  The credit card limit has been reached.  It doesn't mean the country is defaulting on its debts.  It can still pay the minimum payment but charging beyond income must be curtailed.  However, President Obama is demanding the credit card company (in this case, the Congress) raise the spending limit.  Regardless of any current bluster, the Congress will do exactly that in return for nothing.  But it should not be viewed as 'responsible' to raise the Debt Ceiling.

 

Let's go back to the credit card example.  Let us suppose that I have an income $24,675 a year.  I spend $35,405 a year.  My credit card balance is currently $165,000.  Moreover, I have promised to pay $1,222,670 to friends and neighbors who have given me money over the years to invest for their retirement.  Luckily, I just got a raise of $600 a year.  Am I in a good financial position?  Take those same numbers and multiply by 100 million and you have the current position of the government.  The $600 raise is the tax hike from the Fiscal Cliff, which should give some indication that overspending is the problem.

 

These numbers aren't secret.  Anyone who cares to know can look them up.  President Obama didn't just pass a massive new entitlement so he could turn around and slash spending to meet income.  He will push the debt for the next four years and let the next president clean up the mess.

National Default

I am stunned by how many noted economist are reporting that a failure to raise the debt ceiling equals default on the debt.  Somehow, not incurring additional debt equals defaulting on the existing debt.  How does that work?  With the money coming in, the government can easily pay the interest on the $16 trillion debt, send out Social Security checks, pay Medicare, and maintain pensions.  Those would be the debts.  Everything else is just spending that can be cut without risk of default.

 

Stranger still, I read one fellow who said he was opposed to using the debt ceiling as a route to cut spending but was okay with the idea of shutting down the government to put a brake on spending.  Doesn't a failure to raise the debt ceiling do exactly that?  It will cause the government to shutdown all 'non-essential' functions so that it runs on incoming cash rather than the Credit Card of China.  The reason everyone uses 'default' is to instill panic in the populace so that the spending can go on and on.  The spending will stop eventually, on terms we won't like.  Better to stop it now while we still have some hope of digging out of the hole.

 

On a related point, big government tends to slow growth.  Our best hope in recovering is a high growth rate which is becoming more and more out of our reach as government expands.  Look at Europe: massive governments and sluggish economies.  Why go down that path?