This page has been archived and commenting is disabled.
Default 'Catastrophe' Explains Why the Debt Ceiling Shouldn't Be Increased
by
John Tamny, Toreador Research and Trading (Guest Contributor)
Treasury Secretary Tim Geithner has
said that if Congress doesn't agree to a debt-ceiling increase that the federal
government won't have the means to pay its bills, and that such a scenario
would deliver on us a "catastrophic economic impact." Geithner has
been joined in this bit of scaremongering by Ben Bernanke, our walking, talking
contrarian economic indicator who also serves as Fed Chairman.
For fun, let's assume for a moment
that much as stopped clocks get the time right twice a day, that Geithner and
Bernanke are for once correct. If so, their breathy warnings explain why it's essential
that a Republican Congress that pays lip service to smaller government must not
give in to Geithner's apocalyptic warnings.
Indeed, if "catastrophe"
is the certain result of a U.S. debt default, it's fair to say that Treasury
will not default. Rather than default, Treasury will be sure to pay interest
due on U.S. debt, after which a spendthrift Congress will be forced to make do
with funds left over. At that point a Congress that has never been required to
make "tough choices" will have to do just that. Programs will shrink,
or be abolished altogether, and we'll all be better off as a result.
To the above naysayers will point
out that it's overly simplistic to suggest that Treasury can avoid default by
simply staying current on interest due. The argument they make is that revenues
flowing into Treasury are uneven, and that merely making interest payments
is a dicey task given the uncertain dollar inflows. But rather than a promising
argument in favor of raising the debt ceiling, this speaks once again to the
importance of maintaining the one we have.
Indeed, if we face an economic
catastrophe should Treasury default, it's apparent that Congress will not
be allowed to make do with the dollars left over after Treasury makes its
interest payments. Instead, Congress will happily be forced to leave
substantial sums of money with Treasury over and above what's required to pay
interest payments to make sure that it's got cash on hand should dollar inflows
at any time decline. As such, Congress will have even less money to spend, thus
requiring even sharper thinking from the bloated minds of the political class
about where certain cuts can be made, not to mention other programs that can be
abolished.
In short, the presumed default
catastrophe driven by an inability to increase debt is precisely why it
shouldn't be increased. If it's in fact true that a failure by Treasury to
remain current on monies due would shake the global economy, it's fair to say
that we'll never reach that point; the better option one of finally shrinking a
federal government that has grown far too large.
To gain access to our best stock
picks and most extensive buy/sell lists, click here to sign up
for our free weekly newsletter Investment Advisor Ideas.
Assuming an actual default, it
seems there that the Geithner, Bernanke and Congress doth protest too much.
Default doubtless would shake confidence in U.S. debt, this would
surely put a dent in global returns enjoyed by investors who specialize in
buying it, but then it should be said that U.S. taxpayers should not be on the
hook when it comes to subsidizing the world with a supposedly bulletproof place
to park their capital.
Interest rates surely would go up
if Treasury were to default, but then the pain of higher rates would largely be
felt by a federal government that does too much, and spends too much. Higher
interest rates would put Washington on a diet, and while it would lead to more
difficult times in our nation's capital through reduced spending, capital not
vacuumed up by Washington would be left to the productive in the private
sector. Washington's recession would be the rest of the world's boom.
Some will say that a Treasury
default would lead to higher interest rates for all entities public and private
who access the capital markets, but if so, that's to be embraced. It's well
past time that interest rates better reflect market realities, plus if rates
increase, the unspoken of positive here will be an
increase in capital made available by savers to entrepreneurs based
on savers achieving a higher return for monies that aren't consumed.
More broadly, it's time to but to
bed the silly notion that says that U.S. has never defaulted. That's truly a
laugh. Indeed, it must be remembered that the dollar, rather than a commodity,
is merely a concept, or a unit meant to measure real wealth. In the case of the
U.S., a dollar concept that bought 1/35th of an ounce of gold as recently as
1971, now buys 1/1500th of an ounce of gold, and that substantial devaluation
of the dollar concept makes plain that we've been defaulting for 40 years.
About this near 40-year default by our government, it should be said that it's
surely been tragic for all the great economic ideas that never materialized
thanks to floating money values, but it's certainly not led to the Great
Depression scenarios trotted out by our hapless leaders at the Treasury and
Fed.
As for a Republican Congress that
talks a great game about the importance of small government, it's been handed
the political opportunity of a lifetime. Voters are overwhelmingly against an
increase in the debt ceiling, which means Congress has the electorate's backing
when it comes to holding the line on any increases. After that, Republican
apologists always say that the GOP would cut spending but for
institutional inertia which makes true reductions an impossibility.
The above never seemed credible, but
whether it was or not, the voters don't want a debt-limit increase, and the
failure to increase the latter would force the spending cuts that Republicans
claim they want. In short, votes by any Republicans in favor of a debt-ceiling
boost are votes for the kind of big government they regularly rail against. Now
is our chance to see if they actually believe their own rhetoric.
- advertisements -
I say bring it on.
I'm curious-
Would the military industrial complex be required to file chapter 9, or chapter 11?
or, do they have their own special chapter?
and, Since the Gov't basically re-wrote the law when they screwed over GM Bondholders in the interest of labor unions, would that set a legal precedent for Treasury to leverage in screwing US Bondholders in order to keep the money flowing to Congress and the Pentagon?
This whole topic is silly. We already know how this should end. It already played out before the world only 2 ~ 3 decades ago.
The central government (USSR) vanished, but its components (Russia, etc) remained and are fine. And the world is vastly better off.
The central government (USSA) must vanish, and its components (50 states) will remain and do fine. And the world will be even more vastly better off.
That everyone talks about everything except the best, most benevolent and appropriate solution is simply absurd... and a testament to how totally the mainstream media controls the mental processes of almost everyone on earth. To pretend this solution doesn't exist is stupid.
Remember the definition of insanity: "Performing the same action again and agin and expecting a different result."
moronicus politicpimparse bankpuppetica parasiticus : robbers of nations wealth, pension funds and anything not tied down. No redeeming features. Historical cleansing instrument, pitchfork
This addict has been in and out of rehab 78 times since 1960. Whoever thinks they are going to go cold turkey is frankly a moron. Having said that, it would be fun to watch from here.
Since the dollar is only a concept, it is all about nominal values. And as long as nominal values stay even or go up, all is well in the world. The fact that the dollar was once 1/35th of an oz and is now about 1/1500 oz. is not a relevant consideration for most folks. What is relevant is what is the 401k doing?
If the govt eliminated the 1.6t deficit the wailing and gnashing of teeth would be beyond imagination. The name calling, the gamesmanship and the blame placing would be astounding. Poor Grandma! Poor little children! Poor unemployed! Poor Iraqi! Poor govt employee! Poor State! Poor County! Poor City! Poor farmer! Poor electric car mfr! You get the point.
America is built on debt and smoke and mirrors and if you cut the debt the scheme collapses. Debt ceiling will be raised and the Fed will monetize if needed, bet on it.
Ah, just raise taxes to 100% and be done with it. They couldn't possibly spend more than 100% of all tax revenues, now could they? I've learned from this blog that spending is most definitely not the problem, it's all because are taxes are just too damn low.
Sadly, if you read the latest opus over on shadowstats you will find that they have already spent (or committed to spend) more than the potential revenues implied by a 100% tax.
www.shadowstats.com/article/hyperinflation-special-report-2011
Wonderful summation!
And to JW below I believe there is a big difference. The tea party has proposed capping medicare and medicaid. That is trillions of dollars difference from the democrats.
There is no difference between the two party's!
A Lobby Whore is a Lobby Whore is a Lobby Whore...
The cut backs or forced austerity that will be realized during the default process will give the Lobby that much more room for Tax Breaks coming out of the Crisis.
Everyone wants to be able to cut taxes for their rich lobby supporters, the poor has no lobby so who fucking cares what they want...
In the end, the Poor will have Less and the Lobby will have More!
Mission Accomplished!
Except they will have their catastrophe and then decide to raise the debt limit afterwards. We will get the worst of both worlds.