Debt Ceiling Kabuki: Republicans Will Cave and U.S. Government Finances Will Get Even Worse: News: The Independent Institute

Here we are again. Treasury Secretary Janet Yellen warns that the federal government’s borrowing limit has been reached. Even if the Treasury takes “emergency measures”, the government’s ability to make payments will be exhausted within months.

Leaders in the Republican-controlled House of Representatives say the House will not vote to raise the debt ceiling, which would allow continued borrowing without spending cuts. But the White House and Democratic leaders reject the proposal.

Soon the bond markets will be shaken. Fear mongers will raise the alarm that the US will default on its bond obligations and no longer be able to make Social Security and Medicare payments.

The White House will bet that the clash will hurt the opposition, and then a deal will be struck that will essentially involve a concession by the GOP-led House while the White House and Democrats negotiate meaningless budget cuts. reality, reductions in planned increases rather than actual reductions), which, if they ever materialize, will change little in the grand scheme of things.

All this as the US balance sheet continues to slide into banana republic unviability.

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We’ve been here before. There is no indication that the current battle between the Republican House and the Democratic White House over the debt ceiling will not follow a similar scenario.

To begin, let’s be clear about the risk of the US defaulting on its debt. There is no one. The United States can and will continue to borrow and increase its way out of debt pressure. Even if the debt ceiling is not raised (possible only in la-la land), the government could always prioritize its spending, as you and I do, servicing the debt and meeting its obligations to retirees and old patients. Yes, it would have to hold some other payments (that’s what prioritization is all about, right?), but it wouldn’t be the default.

Let’s get clear about something else. The need to borrow does not stem from the COVID-19 pandemic or the war in Ukraine. The deficit has risen by 12% since last year alone, when it fell sharply year-on-year as politicians could no longer convincingly demonstrate that emergency spending related to Covid was still needed.

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Part of the increase is due to rising interest rates. But blaming the Federal Reserve’s monetary tightening for the debt ceiling crisis is silly. The fault lies with the fiscal spenders who have rampantly increased US deficit spending over a long period of time, resulting in an astronomical debt.

Of course, monetary policy seriously contributed to the financial chaos of the US government by keeping interest rates artificially low for over a decade, giving the impression that taking on more and more debt was a small sin that carried little punishment.

The result of this fiscal promiscuity and interest rate suppression is that the national debt has grown from nearly $6 trillion to nearly $31 trillion since the turn of the millennium, growing at nearly six times the rate of growth in interest payments.

This fiction had to face reality sooner or later. That time is now—the Fed needs to let interest rates rise to fight inflation.

The US government’s finances are set to get even worse in the future, with interest expenses projected to triple over the next ten years.

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Continuing to raise the debt ceiling without ever doing anything meaningful about the heavy handed US government is where we are today. If we add up entitlements, mandatory spending measures, the defense budget, and interest spending, Congress has very little discretion (defense is politically inviolable, the rest legally).

One cannot pursue conflicting goals for long and expect consistent results. The welfare state, the war state, and the fiscally responsible state are mutually exclusive propositions.

The US government long ago decided to continue the first two and drop the third. It soon discovers that the other two are also incompatible—precisely because it is impossible to maintain these two behemoths without an enormous sense of financial responsibility.

The House can demand significant spending cuts in exchange for raising the debt ceiling, but it will surely lose because nothing is as it seems in the political game. Especially the expenditure “reduces”. Still worth a shot, I think.


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