Raising the Roof – On a Higher Debt Ceiling That Is!

Many novice observers may wonder why we have a debt ceiling at all when our government has never shown the slightest inclination to respect its prior self-imposed limits [and, as such, why all the] seeming urgency to Congressional negotiations to raise the debt ceiling. [Let me explain in no uncertain terms.] Words: 1073

So says Peter Schiff (www.europac.net) in an article* which Lorimer Wilson, editor of www.munKNEE.com,  has further edited ([  ]), abridged (…) and reformatted below  for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Schiff goes on to say:

Initial Debt Ceiling was Set in 1917 at $11.5B

The [debt] ceiling was first imposed in 1917 as part of a deal that passed the Liberty Bond Act that funded America’s entry into the First World War. To make it easy for the Treasury to sell those bonds, Congress also amended the Federal Reserve Act to allow the Fed to hold government bonds as collateral.

Given the potential for unchecked Federal deficits…Congress… limited taxpayer exposure to $11.5 billion [but, unfortunately,] never passed a law to prevent future Congresses from raising the ceiling – and even if it had, that law could have been rewritten by future legislation.

Debt Ceiling Raised to $300 by 1945 to Finance WW2

When the Second World War rolled around the debt limit was raised frantically, leaving it at $300 billion by 1945 and, believe it or not, after the War ended, the limit was actually reduced to $275 billion. Despite the costs associated with the Korean War, the next increase did not come until 1954 and, over the ensuing eight years, the ceiling was raised seven times and reduced twice, finally getting back to $300 billion in 1962.

Debt Ceiling Has Been Raised 74 Consecutive Times Since 1962

Since 1962 Congress has voted to raise the ceiling 74 times without a single reduction so, practically speaking, a ceiling that is raised automatically is no ceiling at all.

Why Not Dispense With the Pretense of a Debt “Ceiling”?

The reason is politics. No Congressman wants to be on the record voting for unlimited debt, yet most are willing to rail against fiscal recklessness while raising the ceiling every time it’s reached. [Frankly,] any Congressman who gives lip service to a balanced budget Amendment but votes to raise the debt ceiling is a hypocrite.

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No one needs constitutional help to hold the line on the debt right now but epic levels of Federal red ink and the approach of the 2012 elections have raised the stakes. Despite the new-found urgency, nearly all Democrats and a very large chunk of Republicans argue that failure to raise the ceiling:

• will be tantamount to economic suicide
• will cause the U.S. to default on outstanding debt obligations, thereby sending interest rates sharply higher across the board
• will cripple the economy and permanently increase debt service costs
• will precipitate a far deeper economic contraction than what we have already seen in the last few years.

Read this enlightening article (1) on many of the myths behind the supposed debt-ceiling crisis that faces America if it is not passed immediately.

Congress Avoiding Reality

Capping U.S. debt at current levels means bringing a future crisis into the present where it can be dealt with in practical terms. This is something that nobody in Washington actually wants. [Unfortunately, however,] few see the inherent absurdity in the notion that taking on more debt [as the Administration is proposing somehow] improves the economic health and creditworthiness of the United States. I would argue for the much simpler idea that more debt weakens a nation’s financial position.

Not Increasing the Debt-ceiling Would be a Blessing in Disguise

If we do today what we have failed to do in the past, we very may well default on a portion of our debt. No doubt our creditors will suffer but such near term pain will lead to a quicker and healthier recovery. Out of control Federal spending will have to be dealt with now. A downgraded credit rating will make it harder for the United States to continue borrowing, and as a result should be viewed as a blessing in disguise.

A reduction in debt levels is good economics. Remember, taxpayers will have to repay with interest anything the government borrows now. The more the government borrows, the larger it grows, and the larger it grows, the weaker the economy becomes. The less money the government borrows, the more that is available for the private sector to borrow to increase production and create jobs.

Failing to raise the debt ceiling would force Congress:

• to tell the truth to Social Security and Medicare beneficiaries who have been promised more than taxpayers can deliver
• to concede that so-called government “trust funds” are mere accounting gimmicks, and that benefits will need to be cut if the programs are to be solvent
• to tell the truth to our creditors that the U.S government has borrowed beyond the ability of its citizens to repay
• to tell the truth to Federal employees whose salaries and benefits are unsupportable given our fiscal weakness (see these 2 articles here (2) and here (3) on government employee pension plans for an understanding of why such benefits are unrealistic).

On the other hand, if we raise the debt ceiling, [yet again,] we:

• postpone the crisis into an indefinite future… (but in the future the value of principal repayments and government benefits and paychecks will lose purchasing power)
• risk destroying our currency (but that…and the ebbing of a nation’s economic vitality doesn’t make for huge headlines)

Conclusion

It is for [the above two] reason [that] I am 100% confident Congress will do the wrong thing and raise the debt ceiling for the 75th time in 50 years.

In the end there will be some kind of phony compromise with each side claiming victory but while the politicians celebrate another dodged bullet, the U.S. economy will continue to be shot full of holes. [Indeed, as this article (4) attests, it is for that very reason that the future looks so promising for gold.]

Links to Articles Referenced Above:

(1) Top Myths on the U.S. Debt-ceiling Crisis http://www.munknee.com/2011/05/top-myths-on-the-u-s-debt-ceiling-crisis/

(2) Why Government Employee Unions Are To Blame for Impending State Bankruptcies http://www.munknee.com/2011/03/government-employee-unions-to-blame-for-impending-state-bankruptcies-heres-why/

(3) The Day of Gold-Plated Public Sector Pensions are Numbered http://www.munknee.com/2011/02/the-days-of-gold-plated-public-sector-pensions-are-numbered/

(4) America’s Political Process Guarantees Another Financial Crisis! http://www.munknee.com/2011/03/america%e2%80%99s-political-process-virtually-guarantees-financial-crisis-2-0/

*http://www.europac.net/commentaries/raising_roof_debt?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+PeterSchiffsEconomicCommentary+(Peter+Schiff’s+Economic+Commentary

Editor’s Note:

1. The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
2. Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.
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Debt

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