Debt Ceiling Theater

Maybe more borrowing and a heavier debt load is just what the US economy needs...

(Source: Getty Images)

Bill Bonner, reckoning today from Youghal, Ireland...

A dropped ceiling.

The last report we got tells us that Republicans and Democrats have come to a deal. They’ve both agreed that it is in their interests to spend more of your money.

Let’s step back briefly and recall the context.

Either/Or

There are only two choices. People earn their money by providing goods and services to others (most people sell their time); then, either they decide what to do with their money themselves…or someone else decides for them.

That ‘someone else’ could be a stick-up man in a dark alley. More likely, it is the large group of rascals who control the US government.  

They set up an income tax in 1913 to get a share of the workingman’s time.  Originally, the tax rate was 2%. Now, the top marginal rate is 37%. But the federal government spends about 38% of GDP; somehow, the feds must capture 38% of our output.  

Then, in 1971, the Nixon administration cut the dollar loose from gold, making it easier to inflate the currency. Voters don’t appreciate tax increases. But they don’t understand inflation. They think it is caused by greedy businessmen, bad weather, or foreigners. They don’t realize that whether the feds tax it, borrow it, or print it, the money ultimately comes from them.  

Woe to the member of Congress who advocates tax increases (except on the rich!).  Donald Trump pulled a stunt when he cut taxes in 2017. Advertised as a ‘middle class tax cut,’ the savings went overwhelmingly to the rich (Michael Bloomberg got the single largest windfall – a $68 million tax cut). Then, the feds had to borrow more to make up for the lost revenue. Eventually and inevitably, the real costs will show up in higher prices – paid by the middle classes.

While taxing is bad for a politician’s career, borrowing is considered as wholesome as church attendance. The only visible impediment is the ‘debt ceiling,’ which was supposed to keep them from borrowing too much.

And so…the ceiling has to go. 

One Giant Scam

Yes, dear reader, the whole ‘debt default’ hoop-tee-do was a scam. First, because there was never any danger of default; the feds get plenty of money to cover their debt. Second, they have no need to borrow more anyway; they could perfectly well cut the fat if they had to. Third, neither Republicans nor Democrats were ready to give up the habit of overspending. And neither was going to let the debt ceiling stand in their way. In the end, a ‘deal’ was a given...a fait accompli even before it was accompli.

While the dramatis personae were imposters, the plot was phony too. Supposedly,  Republicans…or at least, the Tea Party, MAGA, white supremacist portion of the Republican party… were willing to bring the nation to its knees rather than agree to an increase in US debt. Here’s Laura Veldkamp:

“One side is saying, 'Give me what I want, and if you don't, I won't allow Treasury to issue more IOUs, and it's gonna explode the global economy. This is a disaster. It's an entirely avoidable disaster. This was a ridiculous way to try to save money." 

We remind readers that the federal government already owes $31.4 trillion…and has commitments estimated at another $100 trillion or so – to retirees, mental defectives and so forth. Typically, when you go to buy a house, the lender will give you three times your income – not more. At 600% of the government’s revenue, its Treasury debt alone is way over the limit.    

Just Keep Digging

And even though there was no danger of default…and no real shortage of money… and no emergency to require borrowing – the press made it sound like not going deeper into debt would be the end of life as we know it. Here’s ABC news on the weekend, supplying the fake dramatic tension. If the debt limit is not raised…:

…the U.S. will be unable to pay all of its bills — sowing unprecedented economic turmoil, including lost jobs and major hits to stock markets.

Really? Does the wellbeing, solvency and stability of the US economy depend on more debt? Is that how the real world works…when you’re deep in debt, you borrow more? Is that the key to prosperity?

Your ‘net’ wealth is the difference between what you own and what you owe.  Increasing the debits on the left side of the ledger does not increase wealth; it decreases it.

What strange legerdemain are the feds up to?

Tune in tomorrow…     

Bill Bonner

Joel’s Note: Assuming the debt ceiling deal weasels its way through the greasy halls of Congress, this will be the 79th time the limit on borrowing has been raised since 1960… which really calls into question the definition of the term “limit”… not to mention “borrowing.”

But hey, maybe this time really will be different?

Half a century ago, when a chipper young Joseph Robinette Biden Jr. packed his bindle and went to Washington, the nation was facing a similar debt “crisis.” But it wasn’t the first time this had happened. By the time Joe arrived, ready to roll up his shirtsleeves and get the job done, his senior colleagues were already pros at the old game.

The nation’s very first debt ceiling was established way back on Sept. 24, 1917, in the Second Liberty Bond Act. Back then, the limit was fixed at a paltry $11.5-billion… barely enough to keep the lights on at the White House over the Memorial Day weekend.

Between the wars, the debt ceiling was amended no fewer than 16 times and had grown to a “hard, permanent, line in the sand, to be defended at any cost” $300 billion at the height of wartime borrowing, in 1945. It was then amended in 1954, ‘55 and ‘56… then again in ‘58 and ‘59.

But that was it, the American public were told. These were, after all, extraordinary times. From now on, there would be no more increases…

…until 1960-71, when Congress voted to increase the debt ceiling – temporarily, mind you – another 18 times.

Which brings us to Mr. Biden’s first turn on the helter-skelter debt ceiling ride.

The story goes that, in 1972, the beltway spendthrifts had (would you believe it?) once again blown through their “permanent” debt ceiling of $400 billion… plus an additional “temporary” $30 billion allowance that was to last them through June 30.

According to an article from that year in the CQ Almanac, it was Chairman Wilbur D. Mills (D Ark.) of the Ways and Means Committee who told the House of Representatives the national debt stood above $429.976-billion, “perilously close to the $430-billion limit imposed by Congress in 1971.”

No doubt the situation was grave… desperate… apocalyptic, even.

Thankfully, Joe Biden was on hand to learn the dark art of politicking from his elder statesmen. How to make and break promises… how to draw up budgets without ever expecting to adhere to them… and how to make the whole thing appear as if Congress was working for, rather than against, the American people.

Alas, it was a lesson Biden and his colleagues, on both sides of the aisle, appear to have learned well.