PrintMay 22, 2011
The Debt Ceiling Will Be Raised - No Question about It
Does this sound familiar?
The Republican-dominated Senate voted tonight by 64 to 34 to raise the Government's borrowing authority to more than $1 trillion for the first time in history. The vote to raise the debt ceiling, to $1,079 billion, will allow the Government to start its new fiscal year Thursday with sufficient funds in its coffers to pay its bills...Although the routine increase in the debt ceiling was essential to meet Government obligations already incurred, the vote is traditionally delayed to the 11th hour, with the minority party accusing the party in power of spendthrift ways.
The above passage is from a New York Times article written back on September 30, 1981, which highlights the fight over raising the debt ceiling to $1 trillion for the first time in America's history.
As the U.S. has just reached its current debt ceiling of $14.3 trillion, it is incredibly sobering to see just how much debt the federal government has rung up in just thirty years. The irony, of course, lies in the fact that it was a Republican-controlled Senate and the Reagan administration that pushed for the ceiling to be raised back then.
So much for Reagan being the stalwart of cutting government spending.
Now, the fight is beginning all over again. Democrats and President Obama (who infamously voted against raising the debt ceiling as a senator back in 2006) are pushing for Congress to raise the debt ceiling in order for the U.S. not to default on the debt. Treasury Secretary Timothy Geithner has warned that failure to raise the ceiling will be "catastrophic" to the global economy as interest rates would rise for both public and private borrowing. Judging by Geithner's previous tax troubles, my faith is lacking in TurboTax Tim's ability to manage his own personal finances, let alone the whole country's.
John Tamny, editor of RealClearMarkets and Forbes columnist, agrees that Geithner's fears are overblown. While Geithner may be right that interest rates will rise if the U.S. does fail to meet some of its debt obligations, higher interest rates are precisely what this economy needs right now. According to Tamny, "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."
Higher interest rates stimulate savings, rather than consumption. A higher savings rate provides the capital needed for entrepreneurs and business to make long-term investments into the economy. Rather than having Fed Chairman Ben Bernanke keep interest rates artificially low through "quantitative easing" policies to boost consumption, rates must be allowed to rise. This includes forcing Washington to live within its means.
Unfortunately, this is not going to happen. Speaker of the House John Boehner has already conceded that the debt ceiling will be raised as long as "trillions" in cuts are guaranteed. If these "trillions" in cuts are anything like the recently passed budget deal which promised $60 billion but actually increased spending by $3.2 billion (according to a new Congressional Budget Office analysis), I am not holding my breath.
The debt ceiling will end up being raised after much Republican grandstanding, and so Washington's never-ending appetite for spending will continue unabated. As long as the public expects government handouts, lawmakers will oblige. The "I will have my cake and eat it too" mentality is far too ingrained for major budget cuts to be made now. Congress will kick the fiscal can down the road until the market rears its ugly head and lenders refuse to finance our debt anymore. Only then will Congressmen be ready to tackle the debt. But why wait till then?
