[courtesy Google Images]
The Holter Report“Did you scratch your head . . . just a little bit at how easy John Boehner rolled over and the debt ceiling got lifted by Congress? “Clarity” it was said, and the “uncertainty” of a debt limit was lifted so all should be OK for another year. No sequester, no cutting back …no nothing. That’s right, NO debt limit at all for a year so we (and the markets) should party like its 1999 all over again! Right?”
In fact, only one other nation in the world—it might be Ireland, I don’t recall—has a “Debt Ceiling” like that imposed by U.S. law. For other nations, governmental borrowing is limited only by common sense and whatever the market will bear.
Here, in America, governmental borrowing has been limited only by the Debt Ceiling law—if even that has truly limited our government’s insatiable appetite for more and more borrowing.
For example, the previous debt ceiling was $17.2 trillion, and the National Debt was $17.2 trillion. But John Williams at Shadowstats.com has calculated that the true National debt is closer to $90 trillion. If Williams is right, this implies that the actual $90 trillion National Debt exceeds the legal “Debt Ceiling” by about $73 trillion—over 400% higher than the legal limit.
If so, the official/legal “Debt Ceiling” has been routinely ignored for years. Apparently, government may be legally in debt for $17.2 trillion and illegally in debt for another $73 trillion.
I’m not even sure what that means. I assume the American people are legally liable for paying the official/legal National Debt of $17.2 trillion, but who is liable for paying $73 trillion that was borrowed in violation of the Debt Ceiling law?
The Congressional Budget Office has calculated that, including unfunded liabilities, the federal government is actually in debt for over $200 trillion. I also have no idea if “unfunded liabilities” in excess of the $17.2 trillion Debt Ceiling limit are legal or illegal—but that question may now be moot since last week’s Debt Ceiling law declared that there’ll be no express borrowing limit at all for the next year.
• Hmph. Odd. As Mr. Holter wondered, Why has government chosen to suspend the Debt Ceiling?
I can imagine three possible explanations:
- The absence of a Debt Ceiling means that government anticipates an approaching economic debacle, is desperate for more currency, and has therefore removed any restriction on its ability to borrow enormous and unprecedented sums needed to survive that debacle. That’s possible, but it implies that government expects to see big trouble this year.
- You might conclude, as I have, that government wants to escape the legal borrowing limits and all of the political hoopla that are attached to borrowing limits and permanently repeal the Debt Ceiling law. This year, they’ll suspend the debt ceiling; next year they’ll repeal it completely.
- But there’s a 3rd possibility: The absence of a specific Debt Ceiling might help suppress the growing suspicion that the government is no longer credit-worthy. Here’s why this third hypothesis might be possible:
For a least a decade, we’ve understood that the debt ceiling was imposed by Congress to limit on the federal government’s seemingly insatiable borrowing. Therefore, whenever a new ceiling was declared, the Executive branch was expected to quickly borrow up to whatever maximum limit had been declared by Congress.
For example, if the debt ceiling had been $8 trillion, and Congress declared the new debt ceiling to be $10 trillion, the government might quickly borrow another $2 trillion, push up against the newest $10 trillion Debt Ceiling limit and force Congress to raise the Debt Ceiling again to, say, $13 trillion. Then government would borrow another $3 trillion, push up against the $13 trillion Debt Ceiling and force Congress to engage in another melodramatic debate and another inevitable increase in the Debt Ceiling to, say, $17.2 trillion—which is where the official National Debt was up until the recent Debt Ceiling law suspended that Debt Ceiling for a year.
Now we have no debt ceiling. When it comes to government borrowing, the sky’s the limit . . . or is it?
Let’s suppose that Congress raised the new Debt Ceiling from $17.2 trillion to a “mere” $18 trillion. Government would quickly borrow the additional $800 billion. Congress would soon be forced to play another episode of the Debt Ceiling Follies. Who needs all that aggravation every six to twelve months?
Therefore, rather than increased the new Debt Ceiling that’s just a little, why not authorize a new Debt Ceiling of, say, $20 trillion or even $25 trillion? Then, the government couldn’t quickly borrow all the funds that are authorized, and Congress might avoid another episode of the Debt Ceiling Follies for several years.
So, why suspend the Debt Ceiling rather than authorize a substantial increase of $2.8 trillion in the Debt Ceiling to say, $20 trillion total?
Maybe it’s because Congress fears that that government can’t find any more creditors willing to lend another $2.8 trillion to the government.
In other words, what if Congress authorized a $20 (or $25) trillion Debt Ceiling, but government couldn’t quickly borrow up to the limit of that new Debt Ceiling? Could government’s inability to borrow up to a new Debt Ceiling limit be viewed as proof that the world regarded the U.S. as an unworthy credit risk?
If government couldn’t quickly borrow up to the limit of a new Debt Ceiling, the world might suddenly see that the “emperor was nude”. Once the world openly refused to lend more credit to the U.S. government, the U.S. and global financial systems might collapse.
However, if there were no express debt limit and government could only borrow, say,$1 trillion, government could deny that it’s been “cut off” by the lenders and claim that it “only” borrowed $1 trillion, because that’s all it wanted. It’s like going to a party and not being invited to have a piece of cake. Instead of admitting that you were snubbed, you can save face by claiming that you didn’t have any cake because you didn’t want any.
Without a specific Debt Ceiling, government might similarly claim that if it only borrowed, say, $500 billion, it’s because that’s all it wanted to borrow—not because the lenders refused to lend any more.
This conjecture is certainly a long shot. Still, it might be conceivable that, in order to:
1) Avoid having another congressional Debt Ceiling melodrama every 6 to 12 months if they set a low Debt Ceiling limit; and also,
2) Avoid the risk of proving that no one will lend to the U.S. government if they set a huge Debt Ceiling; that,
3) Congress therefore suspended the Debt Ceiling. Result? No low Debt Ceiling; no high Debt Ceiling; no Debt Ceiling.
So, what’s the most likely reason for a Debt Ceiling suspension?
- Is it to allow government to engage in unlimited borrowing in order to cope with what may be a fast-approaching economic catastrophe? Maybe. If so, we can expect an economic debacle in A.D. 2014.
- Will government use this one year of Debt Ceiling suspension as a first step to repealing the Debt Ceiling laws? Almost certainly, Yes. This is the most benign explanation and does not presume an approaching catastrophe in A.D. 2014.
- Or, could it be that government has suspended the Debt Ceiling limit in order to avoid the public embarrassment of being openly denied credit by the world’s lenders and thereby creating proof that the government is no longer credit-worthy? As these three explanations go, this one’s the least likely.
• Still, this 3rd explanation isn’t impossible since, to some degree, it’s already taking place.
I.e., for the past year or more, the government has been unable to sell most of its bonds on the free market. The world’s lenders have already begun to openly despise U.S. bonds. We know that’s true because the Federal Reserve has been purchasing about 70% of the federal government’s bonds. Purchase by the Fed has been an act of “charity” intended to help government borrowing when no one else would. The purchase of U.S. bonds by the Federal Reserve has been designed to maintain the illusion that the federal government is still credit-worthy.
But, more recently, even the Federal Reserve is trying to avoid lending to the federal government by “tapering” their monthly QE purchases of U.S. bonds.
Given these current realities, it’s not so fantastic to suppose that government might be very sensitive to allowing any program that could further derogate U.S. credit. If so, it’s possible that the Debt Ceiling was suspended to avoid creating proof that the U.S. government’s credit rating is collapsing.
• As 2014 unfolds, we’ll see how much the U.S. government borrows under a suspended Debt Ceiling.
If government succeeds in borrowing a lot, the government’s credit rating will be proven to be high, and explanation #3 will be shown to be ridiculous.
If government (now authorized to engage in unlimited borrowing) is surprisingly subdued or even openly rebuked in its attempts to borrow, then we’ll have evidence that the federal government’s credit rating is falling, and the Debt Ceiling may have been suspended in order to conceal that fact.
We shall see.
In the meantime, the facts remains that the federal government’s access to credit is already shrinking and that loss does not bode well for government’s future borrowing or power.