Thursday, October 3, 2013

The Debt Ceiling and Default

If Congress does not raise the national debt ceiling, does that mean that the government will default?

This is a claim that I have heard several times already and yet we are not even into the final days of debating the national debt limit.  This really is deja vu.  I went through all of this the last time the debt ceiling was a big news item.  Unfortunately, the many myths are still being propagated out there, so I feel the need to set the record straight.  The fewer people being fooled by the propaganda, the better.

Not raising the debt ceiling will not mean a government default, at least on the interest payments on the debt already issued.  The only government default that would need to take place is broken promises.  Over 300 million people living in the U.S. have been promised goodies from the public treasury and Congress would be forced to not make good on many of its promises.  I suppose politicians in Israel and some third world dictators would also be directly affected if foreign aid were cut.

If the debt ceiling is not raised, then this simply means that the government cannot issue any more debt. It means that Congress would be forced to submit a balanced budget.  But we must realize that, due to tax receipts, the federal government alone would still be able to spend well over $2 trillion per year.

The problem here is that Congress does not want to make these drastic cuts.  It would mean cutting foreign aid.  It would mean cutting the so-called entitlement programs.  It would mean ending wars and occupations.  It would mean drastically reducing the welfare state at home.

Congress does not have the political will to do these things.  The politicians love their power.  And right now, unfortunately, public opinion is not strong enough in favor of cutting all of these things.

If you poll Americans, probably a good majority will say they would like to see a balanced budget.  But most do not know what this entails.  If you ask them if most of these government programs should be cut in order to achieve a balanced budget, then you quickly lose your majority.  Most Americans are contradictory in their thoughts, or else they simply have no idea what they are talking about.  They want a balanced budget, but they also don't want to see their favorite programs cut.

This is why the Republicans in Congress will capitulate.  They will eventually raise the debt ceiling.  There is no way they are going to present a balanced budget.

We won't get a balanced budget until we see a crisis in the dollar.  When the Fed is forced to stop buying government debt to avoid hyperinflation, then we will finally get an actual significant reduction in government spending.  If there is nobody who wants the U.S. government's debt at lower interest rates, then Congress will have trouble issuing so much debt.  At some point, we will get something close to a balanced budget.

At that point, the question is what will be cut first.  I don't know that I can answer that, but I am guessing that Medicare and Social Security will be the last to go.  I think Congress will raise the official retirement age, somewhere above 70, but current retirees will still see checks.  The checks may not buy as much, but there will still be checks.

In the meantime, you can count on more government spending and more monetary inflation by the Fed.  But don't count on Congress to hold firm in not raising the debt limit.  And you certainly shouldn't count on any kind of default in terms of U.S. government debt, except in regards to a devalued dollar.

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