Sometime before the middle of May, the United States of America will bump up against its current debt ceiling of $14.29 trillion dollars. The US Treasury is prohibited from borrowing beyond the debt ceiling. Treasury Secretary Tim Geithner has lead the fear mongering about the calamities to follow if the Congress doesn’t raise the debt ceiling.
The assumption is made that if the debt ceiling is not raised, the US Government will default on its bondholders. Default would make the US an unreliable borrower and would lead to higher interest rates as well as an obliteration of US prestige throughout the world. Geithner writes: “Even a very short-term or limited default would have catastrophic economic consequences that would last for decades.”
There’s only one problem with the argument from these beltway insiders. The US government won’t default on its debt if Congress refuses to raise the debt ceiling. The interest on the debt is roughly 4% of the Federal budget. It could easily be paid out of current tax revenues with the existing debt ceiling and would be the administration’s most important spending priority.
If the debt ceiling is not raised, the US house and senate would have to quickly decide which other Federal programs they would cut as a result of their inability to borrow more than the current ceiling of $14.29 trillion dollars. The lack of ability to borrow more would put Congress in the uncomfortable position of having to prioritize government spending and make the necessary reductions in that spending. That’s why Geithner and the others are trying to scare the heck out of the public; they want to put off the dirty work about deciding on which Federal government programs to cut.
An analogy might work well here. Let’s say your brother has refused to get a job for years and has been borrowing money from you consistently. He gets $1,500 monthly from an inheritance, but always seems to spend more than he receives. He comes to you for occasional “loans”. Each year you’ve been lending him a little bit more. Your brother is asthmatic and must always use an inhaler. In fact, not to have an inhaler puts him at a high risk of dying during an asthma attack. His inhaler is his lifeline. After looking at your records you realize that your total loans to your brother are now total a whopping $20,000. Furthermore, the chances of being paid back are almost nil. You tell him that you will loan him no more; the $20,000 is his “debt ceiling”.
In response to your refusal to “loan” him more, he threatens you, contending that without your continued assistance he won’t be able to afford his inhaler. “I’ll die if you don’t loan me more money”, he says. “If you don’t loan me more, there will be no inhaler, my life will be over, and it will be because of your neglect.” Despite his tantrum, you call his bluff and refuse to increase his debt ceiling. You dig in your heels.
What will happen? You know what will happen. Your brother will continue to buy his inhalers and will be forced to spend less on other things, like cigarettes and video games. He will be forced by your “debt limit constraint” to live a more responsible financial life.
That fictional brother is the Federal Government. Geithner’s default talk is like your brother’s “inhaler” bluff. The last thing the Federal Government will do is default on its debt. Like the inhaler, the faith of its creditors is something the Federal Government can’t do without. But, if the Congress refuses to raise the debt limit over the next few weeks, the Government will have to quickly cut back on other spending, just as your brother had to reduce expenditures on other things.
Far from damaging the United States, refusal to raise the debt ceiling will enhance both America’s reputation and fiscal health. Foreign governments will view the United States as a better credit risk once it caps the amount it will borrow. Cutting Federal spending will eliminate waste, free up money for more productive uses, and lead to unprecedented prosperity. Those who lose their jobs in federal service will quickly to divert their talents to private enterprise.
We all know that the federal government needs to reduce spending and cut programs. However, except for tea party members who have been recently elected to Congress, the rest of the establishment politicians want to “kick the debt can further down the road.” Refusing to increase the debt ceiling will force all politicians to deal with reality; and quickly! Far from getting “promises” to reduce federal spending later in exchange for increasing the debt ceiling now, principled members of the house of representatives should simply refuse to raise the ceiling….period. Only then will the necessary budget cuts begin. Only then will the United States of America be back on the path toward true economic prosperity.