Peter Schiff On The Debt Ceiling Delusions

Tyler Durden's picture

Submitted by Peter Schiff via Euro Pacific Capital,

The popular take on the current debt ceiling stand-off is that the Tea Party wing of the Republican Party has a delusional belief that it can hit the brakes on new debt creation without bringing on an economic catastrophe. While Republicans are indeed kidding themselves if they believe that their actions will not unleash deep economic turmoil, there are much deeper and more significant delusions on the other side of the aisle. Democrats, and the President in particular, believe that continually taking on more debt to pay existing debt is a more responsible course of action. Even worse, they appear to believe that debt accumulation is the equivalent of economic growth.

If Republicans were to inexplicably prevail, and the federal government were to cut spending so that its expenditures matched its tax revenues (a truly radical idea) the country's financial mess would be laid bare. The government would have to weigh the relative costs and benefits of making interest payments on Treasury debt (primarily to foreign creditors) or to trim entitlements promised to U.S. citizens. But those are choices we will have to make sooner or later anyway. In fact we should have dealt with these issues years ago. But generations of mechanistic debt ceiling increases have allowed us to perpetually kick the can down the road. What could possibly be gained by doing it again, particularly if it is done with no commitment to change course?

The Democrats' argument that America needs to pay its bills is just hollow rhetoric. Paying off one's Visa bill with a new and bigger MasterCard bill can't be considered a legitimate payment of debt. At best it is a transfer. But in the government's case, it doesn't even qualify as that. Treasury debt is primarily bought by the Fed, foreign central banks, and major financial institutions. None of that will change with a debt ceiling increase. We will just go to the same people for greater quantities. So it's like paying off your Visa card with a bigger Visa card.

According to modern economists, an elimination of deficit spending will immediately cause a dollar for dollar decrease in GDP. For example, if the government stopped sending food stamp payments to poor people, then grocery stores would lose business, employees would be laid off, and the economy would contract. But this one dimensional view fails to appreciate that the purchasing power of the food stamps had to come from somewhere. The government can't create something from nothing. Taxation transfers purchasing power from people living in the present to other people living in the present. In contrast, borrowing transfers purchasing power from people living in the future to people living in the present. The good news for politicians is that future people don't vote in current elections (and current voters don't seem to appreciate the cost to their future selves of current policy).

The Obama Administration has congratulated itself for turning around the contracting economy that it inherited from President Bush. But even if you take the obscenely low official inflation statistics at face value, we only grew at an anemic 1.075% annual pace from 2009 to 2012 (far below the between 3% and 4% that the U.S. averaged post World War II). Sadly, this growth pales in comparison to the accumulation of new debt that we are borrowing from the future.

U.S. GDP is measured at roughly $15 trillion per year. 2% growth means that each year the GDP is approximately $300 billion larger than the prior year. But in the less than five years since Obama took office, the federal government has added, on average, about $1.3 trillion per year in new debt, a pace that is four times higher than the growth. If the deficit were subtracted from GDP, America would be shown to be stuck in a severe recession that Washington can't acknowledge. But such a reality is more consistent with the dismal job prospects and stagnant incomes experienced by most Americans.

The belief that deficits add to the economy, and that debt can be dealt with in an imaginary future (that never seems to arrive) is the foundation upon which the President can chastise the Republicans as irresponsible suicide bombers. Using this logic, he can argue (with a straight face) that borrowing is the equivalent of paying. That the President can make this delusional argument is not so surprising (no lie too great for the typical politician to attempt). What is alarming is that the media and the public have swallowed it so willingly. As they call for limitless increases in borrowing, Democrats have offered no plan to reduce the current debt and they are unwilling to negotiate with Republicans on that topic. Yet somehow they have been perceived as the party of fiscal responsibility.

While the Republicans have a dismal track record of their own when it comes to budgetary management, it can't be disputed that the minor dip in that rate of increase in spending that resulted from the recent Sequester, happened only because they dug in on the issue. Without the 2011 debt ceiling drama, there is no chance that any spending would have been touched.

Democrats had warned that the $85 billion in sequestration cuts slated for fiscal year 2013 (about 2% of the Federal budget) would be sufficient to bring on economic Armageddon. But guess what? We survived. Recently, Senate Majority Leader Harry Reid continued with such rhetoric by declaring that there are no more cuts to be found anywhere in the $3.8 Trillion dollar federal budget. (Apparently he missed last week's 60 Minutes piece on the spreading epidemic of federal disability fraud.)

We have to acknowledge what even the Republicans haven't fully grasped. We are in such a deep debt hole that there is no solution that does not involve serious economic pain. Tea Party Republicans rightly believe that government spending is a drag on economic growth. As a result, they conclude that immediate spending cuts will help with the "recovery". But they are confusing real economic growth with the delusional expansion created by deficit spending (which is actually damaging the real economy). If they cut the deficit, this phony economy may likely implode and cause widespread distress.

So even though a reduction in government borrowing and spending does help the economy, it won't feel very helpful tomorrow. The more we borrow and spend today, the more we will suffer tomorrow when the bills come due. Ironically, cutting government spending now helps the economy by allowing the economic adjustment to happen sooner rather than later. But this type of long-term thinking is very difficult for politicians to consider.

Unfortunately our debts don't leave us much in the way of choices. We can choose to pay now or try to pay later. But the longer we wait the steeper the bill.

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Kirk2NCC1701's picture

"Pay the LATER"?  Are you mad?  We're NEVER paying them off: We won't be able to, nor are we supposed to.

We're just supposed to be indentured Debt Servant to neo-aristocratic bankers, who control everything.  [Monty Python boot stomps down].

Roll the Goddamn Guillotines already!

centerline's picture

They are going to rob the pension funds.  Count on it.

Skateboarder's picture

That's when people will actually start opening their mouths. Maybe. Count on an irresistable pension replacement IOU scheme, and Spiderman towels.

lolmao500's picture

Please. Folks were mad for about 5 minutes after the bank bailouts... then they said : but but but! It was necessary or else the country would have collapsed! They will do the same when their pension funds are stolen.

DaddyO's picture

In the middle of the article, PS started to get up on the perpetual growth bent but redeemed himself towards the end.

Economic growth does not come from .gov, it stems from private commerce, period.

Sometimes private commerce yeilds a profit, sometimes not.

You pays your money, you rolls the dice!

Get the .gov out of the economic growth business and let the citizens get back to running its own businesses.


knukles's picture

Well, I for one land on the side (And it assumes you want to land on a side that concludes with some progress on stopping the Leviathan's progress) that suggests just holding "them" (Whom ever them might be) hostage until there is no more net new debt issuance.
Then the spending, by definition has to be cut back by a factor of approximately 1/2 as that's about the portion borrowed.

Anything else is another beggaring and nit picking about the edges (Hegelian Dialectic Deluxe!) wherein the whole bloody thing just perpetuates for generations...

.... Entropy.

Yes, I know, blah blah blah...
But unless a hard line is taken, one's actions (Or inactivity as per many of youse folks who won't even vote, so just sit home watch Dancing with the Paraplegics and bitch some more) are immaterially insignificant.

Booyah, motherfuckers.


macholatte's picture


But unless a hard line is taken, one's actions.....


Two of the Big Gorillas in the room are now missing from the conversation..... Obamacare and the entitlement of 10-12 million illegals. There is little to be done to stop the damage about to be laid upon what's left of the middle class. Adios motherfuckers!

economics9698's picture

When money is created (debt) it goes to xyz federal agency who then outbids the public for resources. We pay today (inflation) for debt paid tomorrow. Future generation pay the interest or with inflation if the federal government decides that is easier route, 1918-22.

Also Schiff is wrong about cutting federal spending. We cut federal spending 45% after WWII (1945 to 1947) and had growth rates of 1.6%-1945, -0.2%-1946, 9.7%-1947, and 10.0%-1948. Yes there would be a crash but society would recover if left alone.

We lose about 55 cents on the dollar when the feds spend money and waste resources.

shovelhead's picture

Dat be some wealth effect comin' atcha.

James_Cole's picture

People need to understand this stuff better, so much ignorance and stupidity peddled by tools like Schiff.

buyingsterling's picture

I've seen dozens of your posts and they're all pure bullshit.

EnslavethechildrenforBen's picture

Hey Peter Shit - I got one thing to say to you Bitch - GOLD STANDARD - you fucking CUNT

Incubus's picture

do you talk to your mother like that?



EnslavethechildrenforBen's picture

"Delusional Peter Shit on the Imaginary Debt Ceiling Scam"


FEDbuster's picture

"They are going to rob the pension funds.  Count on it."

They already have by diluting the value of the dollar by a trillion dollars (that we know of) per year. 

"In 100 years the FED has devalued the dollar 97%, the next 97% won't take as long.", Dr. Marc Faber

Boris Alatovkrap's picture

Boris invite politician class please come and rob Alatovkrap retirement... empty* hole in ground, politician fall in, break head.

(* empty because Boris is already extract copper ore, but that is different story.)

Bunga Bunga's picture

So what, bankers would sell even their mother anyway.

The Big Ching-aso's picture

I think we ought to stiff everybody out there that we owe money.    Stiff em' good.  What are they gonna do?  Invade us and pry our remote controls from our cold dead hands?

Boris Alatovkrap's picture

Boris is sell, rent, or lease mother-in-law, use as pledge collateral, even re-hypothecate!

TimmyM's picture

James_Cole is a statist idiot. The link he provided is pure statistical garbage. Every Countries situation is unique and the macro study of debt and GDP is all crap. Choosing an arbitrary reactive time frame is meaningless. Measuring real GDP is crap. Inflation timelines are highly variable. These types of macro studies can all be designed to say what ever you want.

James_Cole's picture

Timmy (obviously) doesnt understand it = 'statistical garbage'

vaft's picture

Did you finish reading the article you linked? The conclusion is pretty much exactly what Timmy said -- when looking through the dataset, you can find countries doing well with low debt, you can find countries doing poorly with low debt, you can find countries doing poorly with high debt, and you can find countries doing well with high debt, such that the application of Debt/GDP mathematics provides no rhyme or reason to why this may be so. Obviously, many more variables go into the economic wellbeing of a country besides how laden with debt they are. It sounds like you grasped only the parts of the article that appealed to your own opinions.

buyingsterling's picture

Exactly. The major difference being that in the low debt countries, the people have not been turned into debt slaves for the benefit of statist elites. Mr. Cole is a statist elite wannabe - he thinks that if he can convince people that we can have 'favorable economic conditions' they will and should accept debt slavery. I'll pass.

James_Cole's picture

When R&R did their study folks like Schiff made a big deal of it, until it was proven the math was all wrong (a point the blogpost I linked sums up). ZH covered it as well.

Anyway, obviously you missed the point, here isolated for easy comprehension:

"So out of the 15 countries I can study at the 90% debt level, 10 or 75% of them are either no worse off or appear to be growing, while 1/3 appear to be getting worse. This does not appear to support the notion that only calamity can result when we cross the magical 90% Debt/GDP threshold.


Using the sparse Mathematica code given above, I show that high levels of debt are not a necessary barrier to GDP growth, that there are at least as many countries doing well with high debt as are doing badly, and that it is at least as likely that the causation runs the other way, where slow growth is causing high debt so that we are damaging the economy by cutting back spending now for fear of invoking the wrath of the debt demons. Since these high-level analyses can be carried out conveniently in Mathematica, the errors made by R&R using Excel could easily have been avoided."

StandardDeviant's picture

Hmm.  Wolfram's point seems to be more about the superiority of Mathematica (or, presumably, tools like R, SPSS, etc.) over Excel for this kind of analysis, based on how easy it is to make hard-to-spot spreadsheet errors; not so much about the merits of R&R's study itself, or the conclusions to be drawn from it, if any.

(But then: "out of the 15 countries [...] 10 or 75% of them [...]".  Huh?  I don't need Mathematica to tell me something's just a bit off here.)

MontgomeryScott's picture

I read your comments here about the comparisons between sovereign debt and the 'standard of living' with some amusement.

There may be a point which hasn't been discussed, that I would offer.

I ask: WHO compiles the statistics, and WHO is reporting them?

The unemployment rate here in the CONUS is remarkably low, inflation is tame, economic growth is adequate, and the standard of living has never been higher (according to the institutions that report these things for the CONUS government involved). i mean, you BELIEVE them, don't you?

Stats and spreadsheets are easily manipulated. If you don't count the cost of food, fuel, or other 'non-essential' things, for example, you have an inflation rate that is quite tame...for example.

Yes, 10 out of 15 is .66666...

James_Cole's picture

Yes, 10 out of 15 is .66666...

Gee wiz, you guys are real math geniuses...

Posting here sometimes feels like being at a retirement home, can't anyone do anything on their own, look at the actual article for instance?? 

Seven countries are flat or indifferent at the 90% mark, five are trending down, three are trending up, and five lack the relevant data, probably because they have either never reached this threshold or did so when other reliable data was not available. So out of the 15 countries I can study at the 90% debt level, 10 or 75% of them are either no worse off...

And yes, it is quite obviously advertising their software, but the reason the article is interesting is because it has lots of cool graphs and interaction so you can see exactly where R&R went wrong and compare it to relevent statistical analysis rather than just assume what they (and Schiff) are saying is correct. Though based on peoples (lack of) reading abilities I imagine that unlikely..

LongBallsShortBrains's picture

10/15= .66666 or 66%

But if the statists use math, it must be the math that is wrong.


Turin Turambar's picture

Immoral, economic illiterate.  Can't stop confiscating people's property against their will, the GDP number may go down!  Oh Noes!


Marco's picture

The difference is wealth inequality and value of labour ... the basis for economic growth is gone, the consumer class has almost nothing of value to offer to the capital owners any more. The little value labour has left gets diverted into various rents.

Instead of having an army of GIs getting free education entering the workforce ready to consume you have an army of people up to their eyeballs in debt leaving the universities.

Singelguy's picture

You cannot compare 1945 to current circumstances. At the end of WWII, the USA was the manufacturing power house of the world. Capacity had been destroyed in Europe and Japan, and China was a communist back water. Demand for consumer products and building materials was very strong and unemployment was low, despite thousands of soldiers returning from the battle fields.

Today, the USA has off shored much of its manufacturing, faces strong competition from Asia, and functions in a very weak global economy that has already created record unemployment in Europe and stubbornly high unemployment in the USA. Face it, central banks are the only things keeping the global economy afloat.

If the borrowing and printing were to stop over night, the crash would be severe and it would take time, a long time to recover. An abrupt stop in printing and borrowing by the Fed would likely have a global tsunami effect, throwing the whole industrialized world into depression. At that point who or what drives the recovery? It is much more prudent to enact a gradual but significant reduction in borrowing and spending to wean the patient off his addiction.

Keyser's picture

I agree with you in principal, but we have passed the tipping point in being able to reduce borrowing and spending without collapsing the system. This, coupled with the fact that most currencies are now fiat only exacerbates the problem. There will be no reduction in spending or borrowing as the beast has taken on a life of it's own. At this point, any tampering brings a collapse. This realization became evident after the Bernank did not taper in September and Yellen was names Fed Chairman. 


Cloud9.5's picture

Don't forget the pent up demand that resulted from rationing and the built up savings from working in the war industries.

Seer's picture

Yeah, concentrate on the gorillas when it's the FUCKING JUNGLE that's the issue.

Clearly you're not understanding simple math, that it's SIMPLE FUCKING MATH that's the CAUSE of all of this.  No, not the 10-12 million illegals (wonder whether God would claim anyone as being "illegal?), the stupid fucking notion of perpetual growth on a finite planet.

The "middle class" was, I'm sorry to say, an illusion.  It was based on pure excess from an environment that was as rich as any had ever existed.

750 MILLION folks in India live on $0.50/day.  Was it Obamacare that screwed them?  Or, was it 10-12 million "illegals?"

Moe Howard's picture

Adios, Amigo and see ya on the other side!!!!!!



boogerbently's picture

If NOTHING is paid for, then obamacare and illegals can be "sacrificed" for the greater good.

The MSM may have been trying to convince that it's "the GOP's fault", but when NOTHING gets paid for, it's the dem constituents that will be hit hardest, and want results.....from THEIR leaders.

SeattleBruce's picture

Let me see if we've got this.  Both major parties have absolutely no real clue how to solve this debacle, nor what consquences await us no matter what we do.  And the Ds are more clueless than the absolutely hapless, clueless Rs.  OK, check.  Prepare accordingly.  Politics may again matter during the Reset - we'll see what happens to these dodo bird parties.

Oldwood's picture

Everyone knows how to fix this, even the democrats. They don't because the solutions are uncomfortable, painful and possibly devastatng for some, but delaying will only make it worse. Our politicians are willing to cut our limbs from our body and feed them to us as a solution to hunger. They see us as a mindless mob that they fear and will gladly feed one of us to another to keep the mob off their door steps.

economics9698's picture

The solution is bankruptcy.

buyingsterling's picture

And not reorganizational bankruptcy, rather, total repudiation of all government debt. Unless we establish, for all time, the inescapable fact that democracies cannot be trusted to borrow money, this whole farce will just be repeated again and again. If we have to raise extra revenue for war or emergency, it should come from increased taxes - that helps to insure it's a legitimate war or a real emergency.

Marco's picture

US courts have been creating jurisprudence making it impossible for foreign countries to default on their dollar debts ... if the US tried to do the same it would come to bite them in the ass.

buyingsterling's picture

You're thinking within the constraints of the system. I'm saying the system has to be obliterated once and for all - no more government borrowing, period. Yes, debtholders will be angry. Small price to pay for centuries of freedom from government debt slavery.

Seer's picture

Bankruptcies usually go through courts.  There's ZERO chance of this all being dealt with in a tidy manner.  And if it did then that would imply that the same System that got us into this mess is the one that will be presiding over the "correction."  Yeah, right...

MontgomeryScott's picture

You guys are kind of silly.

The United States has been in receivership since 1933...

Trafficant talked about this in Congress, and (of course) was summarily prosecuted:


I guess the question should be: What happens if you are already in bankruptcy, but can't service the debt? Learn to speak Chinese or Russian or Japanese?

Seer's picture

Politics solves NOTHING.  Politics is all about deception.  The "idea" is to minimize violence, but that violence, like risk, never goes away.  It comes out no matter.  Just think of taxes as paying others to shuck and jive away in order to hold off violence; sad part is that this only makes things worse as more shucking and jiving is happening than actual stuff that's required to live.

It's the System!  ANY system or entity that requires perpetual growth (our entire economic system is predicated on this) on a finite planet WILL FAIL.  Stuffing new operators on a runaway train headed for the cliff is a hope-based strategy.

"Prepare accordingly."  I think it would have been just perfect had you left it right there.

ObamaCaresHugSquad's picture

Without government funding for most of the technology we see around us today, we wouldn't be nearly as successful as we are.  Private industry can take risks, but it can't take immense financial risks, the kind that wartime necessity call for, where money isn't an object.  Think of the Internet (ARPAnet), the radio, the microwave, the laser, nuclear fission, the automobile was perfected in war and most car companies today were wartime companies, the airplane was perfected in war and we wouldn't have nearly the aviation advances that we do without government funding for war purposes, I am sure there is much more, those are just the ones I know of.  Private industry absolutely could not do all of that.  I agree that government is wasteful and could be made less relevant in this country, but you can't beat a source of funding that does not care at all about a return on its investment, because it has other priorities in mind.  Of course, in an enlightened future, we could have a source of funding that does not depend on war to be an incentive.

Keyser's picture

He's another of the "you didn't build that" crowd. I just wish he would enlighten us as to gubbamint spending on technology that has benefited the private sector. The gubbamint have spent ZERO on private sector tech infrastructure, unless he means the NSA taps into private data circuits. 


MeelionDollerBogus's picture

fission RODS are a  big risk, fission on its own, not so bad. Radio: wrong credit. Automobile: wrong credit. Internet: mostly designed by non-government, just the basis was government. They used stolen (tax) money to ensure they had control. Otherwise private industry would have had it much quicker.

What you "know" is garbage.