August 2, 2011
Ceiling Our FateBy Kirk W. Kelsen
Just either side of the contentious debt limit vote in the House on Friday, the United States Congress addressed among its most footling duties: naming and opening new post offices in Mississippi and New York. Were anyone in Washington to think on it, scheduling authorization for a bankrupt federal agency's new baubles even as 3,500 of its other offices are closed made perhaps not the best bookends for the intervening historic legislation. But circumstance being what they are, it does make a nice précis: government spending relentlessly and automatically continues, no matter what's going on.
There is a nascent meme out there portraying Tea Partiers as raging infants (video) demanding ridiculous solutions. Conversely, the eminently respectable Rep. Paul Ryan and author Prof. Thomas Sowell make convincing points about grabbing success where it lies and fighting another day. The Tea Partiers, they say, can't change 80 years of inexorable spending in one Act of Congress alone. No doubt true.
And Charles Krauthammer steps up to make a highly credible point about trying to rule, unconstitutionally, from one majority-held branch of our tripartite system. He asserts that Obama's massive "Keynesian gamble" has been a total failure (it has been); and he derides anyone who would mitigate that liability by refusing to raise the debt limit, thereby creating disasters for which Republicans would be blamed. Perhaps true. Certainly possible.
My thinking is that any debate that drags the conversation closer to the conservative, Tea Party end is a good debate. And any tactic that does the same is worth trying. Need this mean that the debt limit should not be increased? Of course not. It only means that the conversation shifts rightward, even in the face of false "deadlines" established by the other side.
Moody's, S&P, and other rating agencies have made clear that the issue is not the debt limit, but the debt itself -- and America's credibility in reducing it over the next ten years. Thus Senators Rand Paul's and Marco Rubio's substantive arguments that cutting and limiting spending is crucial, either directly or through a Balanced Budget Amendment (BBA).
My thinking on all this has changed over the last few days, and I don't fancy what I've seen to see. Yes, a good fight is being fought in Congress, but will it be a fight that matters?
I don't think so.
As this graphic shows, America is in huge trouble. What is seriously misunderstood is that American financial collapse (read: the world's) is as likely as not in five years -- not 50 or 20 or even ten. Legislative projections currently assume an interest rate for federal borrowing of 3.7% right now, and around 5.2% later. Does that sound probable to you? Me neither. Unstoppable and harrowing, higher interest rates will unravel the whole game. Moody's announced yesterday that the pending legislation is not enough: our credit rating will be lowered in the future regardless of the outcome. Similar to inflation, interest rates eat up your cash in a thousand cuts.
And ushering in inflation comes now QE3 (Quantitative Easing 3, i.e.: "printing money") is moving ahead under Secretary Geithner, unheralded but happening. This is essentially TARP III. Notably, there are federal legal restrictions against printing endless amounts of paper money. Not so for coins. It is not unthinkable for the Treasury to mint $1 trillion in coins, put them in a vault, and then take out loans against them. But I digress.
Seemingly lunatic ravings about fiat dollars ("we declare that this paper is worth this") are no longer fringe. Teetering acceptance of fiat dollars will evaporate at some point as the dollar devalues. And it will happen quite suddenly. This may coalesce just about exactly the time Republicans, God willing, are majority-elected in 2012 -- for what it will be worth, "controlling" a disintegrating, worldwide economic landslide.
Let's wait and see what happens these next few days. The House has passed the "compromise" bill touted by Obama, Boehner, Reid and McConnell, and voted for by Pelosi.
As with the post offices above, spending is relentless. In Washington, increased revenue is always more money, but cuts aren't always cuts, courtesy "Baseline Budgeting." What's that? In short, it means that federal spending will increase automatically every year by about seven percent, no matter what. This has been the case since 1974. So "cuts" don't actually mean cuts in spending, but reduced increase from what otherwise may have been spent. And when the CBO scores a "cut" and says it will reduce spending by $2 billion, what it really means is that spending will increase by $7 billion, courtesy baseline budgeting, year in and year out.
Instead, America needs to be actually cutting, closing up shop for the Department of Education and firing all the regulators and desk jockeys. Or the EPA. Yes, yes: that will increase unemployment and bump UI payments. But increased expenses for 99 weeks sounds like a deal instead of the current forever.
Does the Boehner/Reid/Obama bill shut down any Federal Department or fire even one regulator? No. Instead, it offers a near-meaningless cut of $40 Billion in Year 1 and defers theoretical trillion-sized cuts to Years 7 through 10. Unfortunately for America, there isn't going to be a Year 7, 8, or 10.
As the old saying goes, "If you owe the bank $5,000, the bank's got you. If you owe the bank $5 Billion, you've got the bank." Mark Steyn extended this idea saying, "If you owe the banks 15,000,000,000,000 dollars, the planet has a problem."
All true. But I think the problem is even worse than that.
Ask yourself, by dint of its enormous debt, does America "got" the bank? Maybe. But future debt is money not yet lent to us, and I increasingly suspect it never will be. There is a third party to the issue, neither Republican nor Democrat, about whom no one's talking even though they are key: the would-be institutional lenders who may some day decline our debt. America's short conversation circa 2014 with Ye Olde Moneybags Savings and Loan might be, "Lend you $30 Trillion for next year? In U.S. Dollars?!? ...I think not." And that will be that.
The institutional interests holding America's current and foreseeable future debt aren't playing politics. They're playing for keeps. Nonetheless, even for the wealthy, investments must land somewhere. Will American debt be the best game in town? I'm not sure -- and don't know that anyone can be, with America ceding the Dollar's reserve status and gutting productivity. Grant Williams summarizes (pdf):
Many say we are "going" off a cliff; I say we've gone. The financial order of the last 40 years is radically changing. And there is nothing to replace it except widespread disorder, fractured markets, massive and long-term unemployment, and shriveling economic activity. Facing that cliff, and respected opinions notwithstanding, we shall find that politicians' moderation and even-handedness and reasonableness are not wings. They are the last words of unserious men in the last days of a world that Nancy Pelosi says only she is qualified to save.
The author can be contacted at KirkKelsen@hotmail.com
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