2023-03-07 13:32:24 ET
Summary
- The debt ceiling has been hit once again!
- With the Biden budget coming out this week, the discussions about the possibility of debt default will become real.
- The "debt ceiling" does not work: both Republicans and Democrats abuse it, a solution is always reached, and the problem is once more pushed on down the road.
- After "solving" this debt ceiling crisis at $31.4 trillion, the Congressional Budget Office says that another $19.1 trillion in debt will be accumulated over the next 10 years.
- And, the beat goes on.
The United States is creeping up on a major debt crisis caused by the ceiling that the government has imposed upon itself to limit the amount of debt that the federal government may issue.
The ceiling has always been raised in the past.
The ceiling will be raised this time around as well.
There will just be a lot of noise made in the meantime.
The latest estimate for the date that the government will "run out of money" is August 15.
It is a silly fight because whatever plan is developed to get Congress to approve of a rise in the debt ceiling will be forgotten the day after the new ceiling is accepted.
Mark Zandi, the chief economist at Moody's Analytics, who, with two other economists, has just prepared an analysis of the situation for the Senate Banking Committee's Subcommittee on Economic Policy, believes that "the statutory debt limit should be eliminated."
"I just think you want to break that cycle once and for all as best you can because it is very counterproductive."
But, if the Democrats are writing the government's budget, the Republicans are all "up in arms" about the poor budget management of the Democrats.
And, if the Republicans are writing the government's budget, the Democrats "brutely attack" the Republicans.
The Debt Ceiling is not the way to impose budgetary discipline on the government.
Consequences
Almost everyone agrees that if the debt limit goes into effect, the consequences of this default would be a catastrophe.
"The U.S. economy could quickly shed a million jobs and fall into a recession."
"The damage could spiral to seven million jobs lost and a 2008-style financial crisis in the event of a prolonged breach of the debt limit."
But, this is always the narrative.
And, still, the battle goes on.
The Republicans are now pushing the Democrats up against the wall.
At another time, it would be the Democrats that would be doing the pushing.
This is ridiculous.
Fiscal Discipline
Fiscal discipline is going to have to be established in another way.
To me, one thing that is becoming very obvious is that the "old" Keynesian theories that deficit spending produces faster economic growth are just not credible anymore.
To me, this is one reason why we are in the fiscal shape we now find ourselves in.
Fiscal spending just does not produce the economic growth it once did.
The "multiplier" of government expenditures appears to be less than one these days.
As I have written over and over again, the money that was supposed to go into the production of goods and services now flows into the financial markets. This "credit inflation," as I have labeled it results in rising asset prices, like stock prices, but not into producing the greater growth of labor productivity.
Thus, stock markets rise in value and economic growth languishes at mediocre levels.
The economic expansion from the Great Recession to the Covid-19 Recession accomplished a compound annual growth rate of only 2.2 percent, the lowest since the end of World War II.
Furthermore, the continued emphasis on the Phillips Curve has only exacerbated the situation.
Conducting economic policy to reduce unemployment by a modest amount due to maintaining a higher rate of consumer price inflation, just does not produce the results we need over time.
The Federal Reserve has been pushing to raise its target rate of inflation up to 2.2 percent.
Then, where does it go? Does it go up to 2.4 percent?
This focus has shifted investor behavior so that stimulus goes into the stock market rather than into real investment in capital expenditures. The result is rising stock prices and lower growth in labor productivity.
Fiscal discipline needs to become the focus of the federal government.
Just like the debt ceiling always being raised, are we now getting to the stage of policymaking where the target inflation rate must get raised periodically?
There Are No Gimmicks That Work
The point here is that no fiscal (or monetary) gimmicks work over time.
The only thing that really works is human discipline, and that, we know among politicians, seems to be in short supply.
So, here we are again facing the debt ceiling.
Who knows who will give in or what will be the deal that is cut to move forward?
The only thing we really know is that we will face the same situation again in a couple of years if nothing is done to change things.
The government is in a tough situation.
We are coming out of more than fifty years in which the government followed a policy of "credit inflation."
This policy was actually followed in a fairly disciplined way and things did not get too much out of sync. However, the problem with such a situation is that it is often ended with a crisis of one kind or another that does throw everything into chaos.
The Covid-19 pandemic has provided the environment where the past comes and catches up with you.
The policymakers in the federal government and the Federal Reserve are facing almost impossible tasks right now.
We have worked a long time to get us into this position.
The debt ceiling may be the "cause" of the current approach breaking down.
Can the Republicans and the Democrats reach an amenable solution to the debt ceiling crisis that "pushes us down the road" once again?
Remember, the Congressional Budget Office has just indicated that the deficits for the next ten years will add up to another $19.1 billion.
Or, will they fail this time?
Debt default: an unthinkable thought.
For further details see:
Debt Default: Impossible Thought