The Real Debt Ceiling

AP226751434682_620x350The rollout of ObamaCare and the subsequent government shutdown have engaged the attention of millions of Americans. Unfortunately, both issues are inconsequential compared to what will likely be another battle over raising the debt ceiling. Even more unfortunately, most Americans have little grasp of the economic issues that have brought us to the precipice for the second time in two years.

Most Americans do know the nation is $16.7 trillion in debt, but far fewer understand the implications of such debt. In fact, precious few Americans even know which nation underwrites more of our debt than any other. The overwhelming majority believes it is either China or Japan. The overwhelming majority couldn’t be more wrong. The largest underwriter of U.S. debt is the United States of America, courtesy of the Federal Reserve.

The Fed’s Keynesian-economics-on-steroids buying spree is called “Quantitative Easing” (QE). It consists of spending $85 billion per month, with no end in sight. Of that total, $40 billion is spent on mortgage-backed securities and $45 billion on longer-term Treasury securities.

Where does the Fed get the money to buy these securities? It “prints” money to buy them. To put this in household terms, the Fed is essentially paying down one credit card–by charging it to another credit card. During the Obama administration, QE, along with Congress spending additional revenue we don’t really have, has increased the national debt by an additional $6 trillion. QE has also debased the currency, since creating more currency makes each piece of currency worth less–on the way to becoming worthless.

The Fed has coupled this idea with a Zero Rate Interest Policy (ZIRP), thoroughly convinced that both agendas will “stimulate” the economy, because borrowing money is cheap, and the new money has to go somewhere. That “somewhere” has been the stock market, which has been pushed to record highs as a result. Fed Chairman Ben Bernanke and his fellow Keynesians believe that pumping up the market will result in a “trickle down” effect, as those Americans who feel wealthy with regard to their stock portfolios will spend money and create new jobs. The Fed has pursued QE in one form or another for five years.

During those same five years, the official unemployment rate has never dipped below 7.4 percent, according to the Bureau of Labor Statistics (BLS). That number is a fraud because it fails to acknowledge that we have lowest workforce participation rate in 35 years, and BLS doesn’t count the people who have given up looking for work as unemployed. If the workforce participation rate were the same as it was just before the financial crisis hit in 2008, the unemployment rate would be approximately 11.3 percent.

Furthermore, despite the nation being in a so-called recovery since 2009, we have record numbers of Americans receiving food stamps, record numbers collecting disability checks, and a record number of Americans living in poverty. Americans’ annual household income has also declined by 4.4 percent during the recovery, which is worse than the 1.8 decline that occurred during the recession.

As for inflation, the Fed claims it is under control. Americans might argue otherwise, considering the reality that food and fuel prices have gone up substantially under this administration. Yet many of those same Americans are unaware of the reality that food and fuel prices are not included when the government calculates the inflation rate. While not counting the price of fuel might have some validity, since many Americans use public transportation, every American has developed a habit of eating to sustain themselves.

In short, the Fed’s QE approach is nothing less than disastrous.

And despite everything you hear from this president, his administration, and the rest of the Democratic Party that purports to care for “ordinary Americans,” aka the middle class, it’s precisely the middle class that is being squeezed. ZIRP is a so-called “one-percenter’s” dream, because it pumps up the banks and Wall Street, even as the middle class that prefers not to invest its hard-earned money in the stock market can’t get decent return on savings anywhere else. On the other end of the spectrum, the aforementioned dependency class is also getting taken care of, due to the reality that the statist party is more than willing to countenance increasing numbers of Americans on the government dole in return for their loyalty.

This dual accommodation of both the financial and entitlement communities has engendered a monstrous amount of national debt, fueled by the record-setting, trillion dollar-plus annual deficits needed to pay for it. And despite the Fed’s money printing prowess, even they can’t pony up the kind of revenue necessary to underwrite the entire effort.

Thus we tax, and we do borrow from other nations.

On the tax side of the equation, those who pay them have done yeoman’s work. For the first 11 months of  FY2013, the federal government received a record-setting $2.47 trillion in revenues. Yet they spent all of it, plus an additional $755 billion during the same period. Thus, on the borrowing side of the equation, we are constantly adding to our national debt, and have again “maxed out” our spending limit, reaching the so-called debt ceiling.

Yet even as we constantly bump up against a new debt ceiling, we continue paying interest on the debt we’ve already accumulated. In 2012, the interest on that debt totaled $360 billion. Like the minimum payment on a household credit card, that massive amount of spending does nothing more than maintain the debt at its present levels. Nothing is being paid down.

For the nation in the short term, the media-driven hysteria about the notion that America would default on paying its debt if we don’t raise the debt ceiling, is pernicious nonsense. Currently, interest payments are running about 7 percent of revenue. The worst case scenario is that the Treasury Department would be forced to prioritize where the rest of the money would be spent. Undoubtedly this would ignite a huge fight, as Congress and the administration would be forced to decide which government programs are truly important, and which, to use the jargon-du-jour, are “non-essential.”

Such a fight would be extremely unpleasant, but the nation would survive. Furthermore, neither party has said they are willing to default on our debt, but Republicans want concessions aimed at bringing the debt under control.

Why Republicans want those concessions brings us back to the Federal Reserve and their ZIRP. What the overwhelming majority of Americans don’t know is that we’re paying a record low interest rate of 2.4 percent just to maintain the status quo.

The average interest rate the Treasury paid on U.S. debt over the last 20 years is 5.7 percent. Americans might tolerate paying 7 percent of every dollar collected just for interest, but what about 10 percent, or 20 percent–or more? Not for more Social Security, Medicaid, Medicare, military, or any other government program. Just interest. Just to maintain. How many American families could sustain themselves if 20 percent of their income or more did nothing but keep their credit card debt right where it is now?

And 20 percent may be an optimistic number. CNBC’s Peter J. Tanous explains that just our public debt–as opposed to the money the government owes itself because the politicians have raided the Social Security “lockbox,” for example–will be $16.6 trillion in seven years, according to Congressional Budget Office (CBO) estimates. At an average interest rate of 5.7 percent, the interest payment will be about $930 billion. In 2012, the IRS collected $1.1 trillion in personal income taxes. Based on that figure, debt service would consume 85 cents of every dollar Americans pay in personal income taxes.

Tanous notes something else as well. “Some economists will also suggest that interest rates may go much higher than 5.7 percent largely as a result of the massive QE exercise of printing money at an unprecedented rate,” he warns.

What then? It is not inconceivable that America could be headed for a real debt ceiling, described by National Review’s Kevin Williams as one where immutable reality boils down to “a more or less identical partial shutdown of the government plus suspending most or all Social Security payments indefinitely, eliminating federal health-care benefits, and/or defaulting on our bonds and enduring the subsequent economic chaos” (italic in the original).

An American politician vividly expressed the consequences of continually raising our borrowing limit and accumulating more debt as a result:

“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure,” he said. “It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Leadership means that ‘the buck stops here.’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt and a failure of leadership. Americans deserve better. I therefore intend to oppose the effort to increase America’s debt limit.”

That politician was Barack Obama in 2006.

Barack Obama in 2013? “Raising the debt ceiling, which has been done over a hundred times, does not increase our debt; it does not somehow promote profligacy.” Except that it does. Every time we have raised the debt ceiling, our debt level has increased.

Thus, “insane” Republicans are demanding concessions for raising the current debt ceiling. Those concessions include a one year delay of the new and massively expensive (more than triple its original cost estimate) healthcare bill, a blueprint for tax reform, medical malpractice reform, approval of the Keystone  pipeline, and an increase in offshore drilling for energy. The president’s Twitter response is telling. “I won’t negotiate on anything when it comes to the full faith and credit of the United States of America.”

Due to unprecedented levels of government spending by both parties–nothing more, nothing less–the full faith and credit of the United States of America is hanging by a thread. Either we stop engaging in that insanity or we are finished as a nation. Politicians lie. Math does not.

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  • Lookaatme

    How much of that money went to humanitarian help or nation building?

  • A Z

    I have not read the article.

    The title alone was so provocative that I did not want to read it. My guess is that the debt ceiling is higher than reported because the oligarchy is trying to zoo us like they try to zoom us on the unemployment statistics.

    When an elected representative wants to focus on unemployment (U3) and not U6 (underemployment or discourage workers) and the labor force participation rate, I know they are lying by omission.

    Lying by omission is what Obama engages in a lot.

    Anyone that would zoom us on U3 will lie about all the other economic indicators.

  • rbla

    Our present economic problems are a direct result of the hollowing
    out of the economy due to the cult of diversity, mass immigration and so-called
    free trade. See

  • A Z

    “This dual accommodation of both the financial and entitlement communities”

    Government run by the Democrats is like a terminator.

    Terminator kill “that is all they do.”

    Democrats create donut holes.

    They have created Donut holes in health care, education and now overall in the economy.

    The Democrats are kiIIing the middle class. “That is all they do.”

    • A Z

      The Health Care Donut Hole came into existence in the early 1980s. Who was histrionically campaigning to fix health care?

      It was Ted Kennedy, the so called Lion of the Senate. Almost 40 years (2 generations) later and we still have a donut whole.

      Thank a Democrat.

      Medicare Part D “Donut Hole” 2013

      • A Z

        I was wrong.

        Ted Kennedy had been mucking up American health care since at least 1973 (see the HMO Act of 1973 ).

        “As the author of the first HMO bill ever to pass the Senate, I find this spreading support for HMOs truly gratifying. … HMOs have proven themselves again and again to be effective and efficient mechanisms for delivering health care of the highest quality.

        “Today, if your child has a rare congenital heart defect and no specialist in the plan is equipped to treat it, your [HMO] plan can condemn your child to second rate care from the doctor who happens to be on the plan’s list…

        Democrats tinker and tinker creating donut holes constantly.

        They did so in Health care (1/6th of the economy) and now they are doing across the whole economy.

  • William_Bradford

    Just a brilliant article… one of the best I have read regarding the financial time bomb awaiting us all.

    If you didn’t follow the links, please do for they carry far more information than the basic article

  • PV

    What would happen if the Fed tore up its 6 trillion in debt?

  • justquitnow

    And when the debt ceiling was raised 7 times during the Bush Administration, Arnold had zero to say about it. In fact the sky rocketing debt under Bush even with the wars largely funded “off the books” never deserved even a grumble. Even now in his article, there isn’t a trace of how we got here, just that Obama is spending like a drunk sailor and things are out of control…our nation…almost finished. If Congress doesn’t like the spending, congress can pass laws to change the spending….but trying to defund laws through shutting down the government is not constitutional….it’s thuggery. And even after the sequester to again put us at risk over the debt ceiling is sabotage. When you hate the government…and want it destroyed, what’s a little shutdown?

  • colony14author

    “Most Americans do know the nation is $16.7 trillion in debt…”
    I beg to differ. Part of the problem is that most Americans do not know that, and many who do know do not care!