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Guest Post: Who Needs The Debt Ceiling?

Tyler Durden's picture





 

Submitted by Russell Lamberti of the Ludwig von Mises Institute,

US lawmakers reached a budget deal this week that will avert the sequester cuts and shutdowns. These fiscal “roadblocks” supposedly damaged investor confidence in 2013, although clearly no one told equity investors who’ve chased the S&P 500 up 26 percent this year. But even so the budget deal is seen by inflationists as only half the battle won, because it doesn’t deal with the pesky debt ceiling. Unsurprisingly, the old calls for a scrapping of the debt ceiling are being heard afresh.

Last week, The Week ran an opinion piece by John Aziz which argues that America (and all other nations for that matter) should keep borrowing until investors no longer want to lend to it. To this end, it is argued, the US should scrap its debt ceiling because the only debt ceiling it needs is the one imposed by the market. When the market doesn’t want to lend to you anymore, bond yields will rise to such an extent that you can no longer afford to borrow any more money. You will reach your natural, market-determined debt ceiling. According to this line of reasoning, American bond yields are incredibly low, meaning there is no shortage of people willing to lend to Uncle Sam. So Washington should take advantage of these fantastically easy loans and leverage up.

Here’s part of the key paragraph from Aziz:

Right now interest rates are very low by historical standards, even after adjusting for inflation. This means that the government is not producing sufficient debt to satisfy the market demand. The main reason for that is the debt ceiling.

What this fails to appreciate is that interest rates are a heavily controlled price in all of today’s major economies. This is particularly true in the case of America, where the Federal Reserve controls short-term interest rates using open market operations (i.e., loaning newly printed money to banks) and manipulates long-term interest rates using quantitative easing. By injecting vast amounts of liquidity into the economy, the Fed makes it appear as though there is more savings than there really is. But US bond yields are currently no more a reflection of the market’s demand for US debt than a price ceiling on gasoline is a reflection of its booming supply. Contra the view expressed in The Week, low rates brought about by contrived zero-bound policy rates and trillions of dollars in QE can mislead the federal government into borrowing more while at the same time pushing savers and investors out of US bond markets and into riskier assets like corporate bonds, equities, exotic derivatives, emerging markets, and so on.

Greece once thought that the market was giving it the green light to “produce” more debt. Low borrowing rates for Greece were not a sign of fiscal health, however, but really just layer upon layer of false and contrived signals arising from easy ECB money, allowing Greece to hide behind Germany’s credit status. As it turned out, a legislative debt ceiling in Greece (one that was actually adhered to) would have been a far better idea than pretending this manipulated market was a fair reflection of reality. Investors were happy to absorb Greece’s debt until suddenly they weren’t.

This is the nature of sovereign debt accumulation driven by easy money and credit bubbles. It’s all going swimmingly until it’s not. And there is little reason to think this time the US is different. Except that America might be worse. The very fact of the Fed buying Treasuries with newly printed money proves Washington is producing too much debt. China even stated recently that it saw no more utility accumulating any more dollar debt assets. If the whole point of QE is to monetize impaired assets, then the Fed likely sees Treasury bonds as facing considerable impairment risk. Theory and history are clear about the reasons for and consequences of large-scale and persistent debt monetization.

Finally, it is wrong to assert that the debt ceiling is the main reason for America’s fiscal deficit reduction. The ceiling has never provided a meaningful barrier to America’s borrowing ambitions, hence the dozens of upward adjustments to the ceiling whenever it threatens to crimp the whims of Washington’s profligate classes. America’s rate of new borrowing is falling because all the money it has printed washed into the economic system and found its way back into tax revenues. Corporate profits are soaring to all-time highs on dirt cheap trade financing. Corporate high-grade debt issuance has set a new record in 2013. Companies are rolling their short-term debts, now super-cheap thanks to Bernanke’s money machine, and issuing long, into a bubbly IPO and corporate bond market. The last time corporate profits surged like they’re doing now was during the credit and housing bubble that preceded the unraveling and inevitable bust in 2008/09.

These are money and credit cycle effects. The debt ceiling has had precious little to do with it. Moreover, US debt is neither crimped nor the US Treasury Department austere. Instead, the national debt is soaring, $60,000 higher for every US family since Obama took office and rising. Add to this the fact that the US Treasury’s bond issuance schedule is actually set to rise in 2014 due to huge amounts of maturing debt needing to be rolled over next year, and the fiscal significance of the debt ceiling fades even further.

The singular brilliance of the debt ceiling however, is that it keeps reminding everyone that there is a growing national debt that never seems to shrink. That is a tremendous service to American citizens who live in the dark regarding the borrowing machinations of their political overlords. Yes, politicians keep raising the debt ceiling, but nowadays they have to bend themselves into ever twisty pretzels trying to explain why to their justifiably skeptical and cynical constituents. Most people don’t understand bond yields, quantitative easing, and Keynesian pump-a-thons too well, but they sure understand a debt ceiling.

 

Conclusion

Those who adhere to the don’t-stop-til-you-get-enough theory of sovereign borrowing, and by extension argue for a scrapping of the debt ceiling, couldn’t be more misguided. In free markets with no Fed money market distortion, interest rates can be a useful guide of the amount of real savings being made available to borrowers. When borrowers want to borrow more, real interest rates will rise, and at some point this crimps the marginal demand for borrowing, acting as a natural “debt ceiling.” But when markets are heavily distorted by central bank money printing and contrived zero-bound rates, interest rates utterly cease to serve this purpose for prolonged periods of time. What takes over is the false signals of the unsustainable business cycle which fools people into thinking there is more savings than there really is. Greece provides a recent real-world case study of this very phenomenon in action. In these cases we are likely to see low rates sustained during the increase in government borrowing, only for them to quickly reset higher and plunge a country into a debt trap which may force default or extreme money printing.

Debt monetization has a proven track record of ending badly. It is after all the implicit admission that no one but your monopoly money printer is willing to lend to you at the margin. The realization that this is unsustainable can take a while to sink in, but when it does, all it takes is an inevitable fat-tail event or crescendo of panic to topple the house of cards. If the market realizes it’s been duped into having too much before the government decides it’s had enough, a debt crisis won’t be far away.

 


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Sun, 12/15/2013 - 17:29 | Link to Comment NIHILIST CIPHER
NIHILIST CIPHER's picture

BLAH BLAH BLAH BLAH BLAH, this usually ends badly.   DEBT porn dose for today, open wide.

Sun, 12/15/2013 - 17:40 | Link to Comment AlaricBalth
AlaricBalth's picture

The debt ceiling has been raised 14 times since 2001. We don't have a true debt ceiling. It's a political debt ceiling.

Sun, 12/15/2013 - 17:48 | Link to Comment TheFourthStooge-ing
TheFourthStooge-ing's picture

It's easy: just make the debt ceiling the highest number that exists.

Sun, 12/15/2013 - 19:25 | Link to Comment bunzbunzbunz
bunzbunzbunz's picture

Bitcoin has a 21 Million debt ceiling. Get some free: http://freebitco.in/?r=25727

Sun, 12/15/2013 - 23:37 | Link to Comment mvsjcl
mvsjcl's picture

What "market" is this Aziz person talking about?

Sun, 12/15/2013 - 18:00 | Link to Comment Kirk2NCC1701
Kirk2NCC1701's picture

BFD. Just switch to a Log(Debt) scale, and things appear linear again.
And the debt-slavery (wealth transfer) can continue.
/s

Sun, 12/15/2013 - 19:54 | Link to Comment ZH Snob
ZH Snob's picture

America (and all other nations for that matter) should keep borrowing until investors no longer want to lend to it.

Aziz acts as if we have these mysterious investors with money falling out of their pockets who are too stupid to stop lending our government $ and that we should simply take advantage of their largess.  He conveniently overlooks the fact that these investors are now the fed, the lender of last resort, and that they are monetizing the debt.  if he is even willing to admit this much then he must also think this to be no problem at all.  that they will gladly write off our debt out of the goodness of their blackened hearts.

Sun, 12/15/2013 - 17:33 | Link to Comment ILikeBoats
ILikeBoats's picture

Here comes the judefetzen ...

Sun, 12/15/2013 - 18:13 | Link to Comment max2205
max2205's picture

I have entered WOWland

Sun, 12/15/2013 - 17:38 | Link to Comment negative rates
negative rates's picture

Where you gonna go after you won the debt ceiling debate, i'm goin to disney world.

Sun, 12/15/2013 - 17:42 | Link to Comment NIHILIST CIPHER
NIHILIST CIPHER's picture

Debt ceiling is a myth, if it was real we would not be printing 1TR in monopoly money per year as we are now. That's what happens when you let the criminals control your gold and your currency.

Sun, 12/15/2013 - 18:50 | Link to Comment Oldwood
Oldwood's picture

The debt ceiling debate is simply a test of the public to see if they are paying attention. So far so good, keep the presses warmed up! Everyone just believes our government is run by idiots ( a theme our leaders use quite effectively to cover for the evil they do). Nobody seems to give a fuck about anything but whats on TV. If you really want to piss them off, try preempting "Dancing with the Stars" with an announcement that we are officially broke and the world is coming to an end. That will get them into the streets! You can do anything but don't fuck with their "program".

Sun, 12/15/2013 - 21:35 | Link to Comment What you talkin...
What you talkin about Willis's picture

NO fucking shit man,

 

Was watching Tv with the fam and during commercial break from one of the hand egg games my bro was channel flipping and sure as fuck Max Keiser was on, told him to stop,  great episode the one talking about how the Uk parliament stop the Syrian war,, at least a big road bump, it wasn't one for more then 15 seconds before the screams/whines to change the channel came out, the you mean I might have to fucking think for a few seconds kinda moan, piercing to the ears.    If I had the remote and had refused to change the channel there would have been a family riot.  Dam fucking straight don't mess with the bread and circus.

Sun, 12/15/2013 - 17:46 | Link to Comment q99x2
q99x2's picture

Shut down the Federal Government and stop them from attacking the United States of America.

The Globalists have gutted their support base. Now there is no one to protect them from China and Russia and North Korea and Somalia and Saudi Arabia and Israel and so forth.

Bye Bye UN globalists you dumb fucked your way outta here.

Sun, 12/15/2013 - 18:00 | Link to Comment deflator
deflator's picture

="font-family: 'Lucida Grande', Verdana, sans-serif; font-size: 13.600000381469727px; line-height: 17.325000762939453px;">If the market realizes it’s been duped into having too much before the government decides it’s had enough, a debt crisis won’t be far away.

 

   The government will never "decide" that it has had "too much.> btfath bitchez before it's too late? all your gold are belong too us?

Sun, 12/15/2013 - 17:58 | Link to Comment yogibear
yogibear's picture

Raise the debt ceiling to $32 trillion then spend like drunken sailors. It's that the plan anyway?

Essentially no debt ceiling and print like a mo-fo to pay for it. No intention on paying it back.

Just print the debt away like Zimbabwe. Zimbabwe economics.

Sun, 12/15/2013 - 18:11 | Link to Comment carlnpa
carlnpa's picture

Yogi 32 trillion is a good start.

Think bigger, a quadrillion (1000 trillion), is the message that needs to be sent to the markets and our trading partners.

 

Sun, 12/15/2013 - 18:52 | Link to Comment Oldwood
Oldwood's picture

That is what set Europe free. All they had to do was say they "would do whatever it takes" to keep it all afloat. You can do a lot of stupid shit on the high wire when you know you have a net.

Sun, 12/15/2013 - 19:09 | Link to Comment RafterManFMJ
RafterManFMJ's picture

32? Bullshit, raise it to a nice even 50 trillion, and pass legislation that THIS IS A HARD LIMIT NEVR TO BE EXCEEDED except in case of a National or local emergency such as a big terrorist attack, war or police action or a bad harvest or 1/3 of Congress voting to raise it for whatever reason they see fit.

Sun, 12/15/2013 - 21:21 | Link to Comment ForTheWorld
ForTheWorld's picture

20 years ago, $20 Trillion would have been considered that hard limit, never to be exceeded. Politicians never want a hard limit, because it means there is an actual budget to stick to.

Sun, 12/15/2013 - 18:11 | Link to Comment Atomizer
Atomizer's picture

Bo, the WH dog will come thru by activating the surveillance devices. In the meantime, we can watch

Barack Hussein Obama sucking dick on this fine Sunday afternoon.

Please, we don’t want to watch this President sucking off another leaders dick or riding a Chinese counterpart for more ACA slush fund money. Secret Service, spare us the nauseating details.

 

Keep your eye on Bo, we think he has been equipped with one of those Israeli flea camera devises the taxpayer funded for.

/sarc

Sun, 12/15/2013 - 18:16 | Link to Comment alfred b.
alfred b.'s picture

 

What's wrong with this 'debt system' is that the criminal element incurring the debt will not be liable for it nor take responsibility for its re-imbursement!

 

 

Sun, 12/15/2013 - 18:55 | Link to Comment Oldwood
Oldwood's picture

That's our job.

Sun, 12/15/2013 - 18:56 | Link to Comment Seasmoke
Seasmoke's picture

The tribe may not pay back the debt, but it is going to pay a big price one day

Sun, 12/15/2013 - 19:17 | Link to Comment Atomizer
Atomizer's picture

Just tell all three branches of US Government to raise the debt ceiling level to Googol and we’ll see you in less in two years.

(10,­000,­000,­000,­000,­000,­000,­000,­000,­000,­000,­000,­000,­000,­000,­000,­000,­000,­000,­000,­000,­000,­000,­000,­000,­000,­000,­000,­000,­000,­000,­000,­000,­000.)

 

Watch piss leak down their pants or skirt. Our currency would evaporate in 60 days. The idiot behind the scenes instructs the politician to agree on a specific figure. Fucking ruin his day & request for a Googol debt ceiling increase. Comedy will ensue.

Sun, 12/15/2013 - 19:29 | Link to Comment falak pema
falak pema's picture

Markets now are manipulated by Oligarchs to their interest via CB plays and private banking derivative pile ups. And all responsible people in government are in gridlock. They are obliged to play along with the herd.

A bit like ZH, where the outrage is community mantra, the mainstream elements of government who are not part of the rip off  are impotent bystanders of the runaway money machine and its admininistrative support matrix rolling along to destination "hole in the virtual wall" of banksta concoction.

Can these people continue to maintain steam ? NO!

Will they crash to rock bottom? I don't know and I don't think anybody else does.

But... As I have always predicted when "thieves fall out" the cradle will rock. Wait and Hope is what Edmond Dantes said. As a corrupt system has to "belly up". But it can also go from bad to worse! The French revolution taught us that in strange meandering ways that moved towards material and legal progress for brief periods but regressed in terms of imperial repression. What Pax Americana does today is similar. 

The main Matrix of Pax Americana is not willing to change its course; but its current global partners could become active antagonists in economic terms down the road. We all know that.

If reset comes it won't be along the lines ZH predicts. Of that I feel pretty sure... but I don't know how the cookie will crumble as they are so many variables; not least, peak RM and eco disasters. 

History's trends show that the down side is OFTEN worse than we expected within the Empire but the upside is often a rebound that is proportional to the depth of the crash, more so where the levers of power still work. There are enough forces of good to repair the collapse of an electronic money system gone globally corrupt. Western economic reconfiguration in attrition will continue; alas more like the 19 th century days as we are in regression relative to this hubristic construct post 1971 that has fragilised the social compact and it takes decades to heal the festering.

This globalisation thingie has made the wealth transfer, from bottom to top and from West to East, a divide that it will be easy to repair within each nation state, but not amongst rival nations. Capitalism will still be driven by Ricardo type logic amongst rival socio cultural continental economies. Lets hope the local reset will be peaceful in developed world. Looking at the forces of entropy now accelerating in third world their future looks painful. But we can already see islands of resurgent dynamism emerging as a result of Oligarchy wealth transfers looking for labour arbitrage; the trickle down to local economies given their abysmal starting point has been significant. Not all is evil in these global empire plays. 

Timing and duration is something nobody can tell. But this will spell the end of Libertarian/neo-con capitalism and the emergence of a new paradigm which will not be maximising short term IRR of projects; in WS asset and similar global asset constructs  maximisation, as the Reagan-Thatcher dictat OBLIGED the global deregulation mantra to become. (I do not differentiate between libertarian, Clintonian and Neo con ideology, as the top echelons of US oligarchy constantly show us; red:blue: libertarian are essentielly on the same page relative to what the world needs and where the world heads.) Their game is over in this current spiral, at least I hope so as its ENTIRELY their brainchild. 

All this means that the grandson of the Bush family, new scion, will not be as much an Oligarchy baron as were his past family members. We all can see the American model and its elitist ideological motors will lose their global impetus as vectors of excellence.

Not saying his progeny is destined to be Rosemary's baby! 

 

Sun, 12/15/2013 - 22:42 | Link to Comment shovelhead
shovelhead's picture

Did Napoleon get voted off the island yet?

Mon, 12/16/2013 - 05:31 | Link to Comment falak pema
falak pema's picture

the Brits apparently, although there is no material proof just rumours, decided to poison him with arsenic! 

I guess even Putin didn't invent that polonium thingie!

In fact, during the Religious wars, Florence was famous for its poisons for political purpose!

Voting never worked in a hegemony. Maybe its something that is becoming more apparent today; once again, alas!

Sun, 12/15/2013 - 22:44 | Link to Comment bobert
bobert's picture

Didn't HR 2775 do away with the "Debt Ceiling?"

 

Mon, 12/16/2013 - 07:50 | Link to Comment ejgej
ejgej's picture

The market. the market, the market... If so, why had the Fed to buy 30% of US Debt in last 5 years, if that was so plenty of buyers? And why an other 40% of US Debt is kept by China and Japan?
What's the market that naturally regulates the convenience of Tbonds, when 70% of US debt has been bought by State Agencies (US and abroad)?

And you still say the Debt Ceiling isn't a political matter? It's not only a DOMESTIC political matter, that's for sure, it's with all evidence a political INTERNATIONAL affair!

Mon, 12/16/2013 - 11:28 | Link to Comment moneybots
moneybots's picture

"Last week, The Week ran an opinion piece by John Aziz which argues that America (and all other nations for that matter) should keep borrowing until investors no longer want to lend to it.
 To this end, it is argued, the US should scrap its debt ceiling because the only debt ceiling it needs is the one imposed by the market.

 

Then the market should impose ALL interest rates at the FED, as well.

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