Tuesday, April 19, 2011

Abolish The Debt Ceiling!

That's my solution to the impending crisis over raising the legal US debt ceiling that threatens to shut down the US government, throwing us into many difficulties, and possibly crashing global financial markets if the US Treasury defaults on debt, thereby possibly throwing us back into a deep global recession. It is fear of political paralysis over raising the debt ceiling that lies behind the S&P's announcement yesterday of a downgrade to "negative" of prospects for US debt ratings, even though that remains AAA, which has in turn triggered Republicans like Eric Cantor to double down on demanding stronger budget cuts (really do in Planned Paranthood???) as the price for allowing another round of raising the debt ceiling.

As near as I can tell, I am the first person to publicly call for abolishing the debt ceiling, but there are very good reasons for doing so. The top is that the US is the only country in the world that I could find after considerable searching that even has one. Lots of googling only turned up a 2009 move in Germany to limit debt by its states, or Lander, although not on its federal government. A study by the Congressional Research Service, updated in 2008, made estimates of "debt ceilings" for many countries, but these were based on estimates of those countries' abilities to handle the interest payments of their debts, and the paper explicitly distinguished these artificially estimated debt ceilings from the "US legal debt ceiling" http://fpc.state.gov/documents.organization/105193.pdf . This study covered pretty much all of the high income OECD economies. Maybe Gambia or some other totally obscure country has a debt ceiling like the US does, but so far I have been unable to find a single one, much less any that have ever had one.

So where did it come from? The first such debt ceiling was imposed by Congress in 1917 at the time of US entry into WW I, when they passed the Second Liberty Bond Act, which allowed the US Treasury to issue long term bonds to fund the war effort. That initial debt ceiling involved several, each tied to different kinds and maturities of the US debt instruments. In 1939 these were unified into a single overall debt ceiling, which has been our system ever since. With the massive borrowing during WW II, the ceiling was raised by huge amounts each year. In more recent years, until now, the increases have usually been pro forma, with a total of 69 such increases since 1962.

So, this is something that people completely take for granted in the US, but for which there has never really been any good reason to have and now is clearly a major source of potential damage and trouble, with nothing good served at all by continuing to keep it. The irony is that it is especially ridiculous in a system of divided executive and legislative power such as we have, although that is probably why it was put in in the first place, to keep a war-fighting executive in line. In parliamentary democracies, if there is a profound dispute over budgets, there is a vote of no confidence, the government falls, there is an election, and the new one gets to deal with the mess. In ours, there is no fall of government if there is a breakdown between the branches as we seem to be heading towards, but we may get a politically caused financial collapse for which there is absolutely no good reason whatsoever, a weird gift from Mr. Madison's separation of powers.

So, I say, let us get rid of this dangerous monstrosity, the sooner the better. Abolish the US debt ceiling, and now!

8 comments:

trucker said...

People believe whatever boogerman crap is spewed by the liars in Washington as aided by the corporate media. The reality is that the USA does not actually need to borrow. T-Bonds 0ffer a secure method for people to "save" so long as they pay the taxes they should. The sort of "cuts" being discussed have very little to do with deficits and everything to do with Republican pig crap.

Stephan said...

I agree.

But Germany has indeed now something alike the US debt ceiling. Our stupid politicians signed into law the so called "Schuldenbremse" (debt break) which is also limiting the ability to issue federal debt.

Now the conservatives are totally excited and look forward to balanced budgets all time long. The problem is that once economic nirvana is with us the conservatives will realize that something is missing. There won't be enough Bund available to satisfy the saving desires of their clientele.

I'm very curious with what economic excuse they will come up after they realize that this debt break wasn't such a good idea.

Barkley Rosser said...

Stephan,

I was under the impression it was only a limit on the Lander. However, all the discussions I have seen at the federal level have involved a deficit limit as a percent of GDP, rather like those supposedly in place at the EU level, which is not the same thing as an absolute, nominal money amount of aggregate debt, which is what the US debt ceiling is. If Germany has something at the federal level, is it not this sort of percent of GDP limit on an annual budget deficit?

Danke schoen in advance.

Brenda Rosser said...

Okay, let's say the US and other nations abolish their debt ceilings. Then, whenever the interest on their debts -debts that are inevitably held mostly by the rich and the big global corporations - reaches extraordinary levels, these nations all just simply print money.

Would not we then observe a global liquidity glut. Lots of money chasing fewer and fewer investment opportunities. This encourages greater and greater levels of risk taking and outright fraud as a business model.

Then onto a global financial crisis as the ponzi game unfolds. Banks won't lend to other banks because they know they're all bankrupt.

Of course, that problem can be fixed by the government bailing out the big guys; by printing yet more money.

By that time almost all possible investment opportunities have dried up. Ponzi Fukushima - with its ultimate and forever risk taking model - blows and wipes out the entire north east of Japan. The 3rd largest global economy goes into nose dive taking the US with it.

The enormous amount of heat generated by 40 years of spent fuel rods and 4 reactors melting down simultaneously heats up the world's atmosphere. 60 twisters devastate the eastern American states closing down the power of yet more nuclear reactors; this time in Virginia. Thousands of FEMA workers rush to the scene. But how to pay for such a huge wage bill when the economic resources of the nation are so depleted.

Print more money. Invest in thousands of millions of hectares of tree monocultures planted across the entire Southern Hemisphere. Then hold the expected insect attacks at bay with billions of gallons of toxic residual pesticides.

Oh no! That's already been done.

What next?

Brenda Rosser said...

PS: the latter reference to tree plantations is presented as yet another example of a global ponzi scheme. Quite literally. The companies are generally now in the hands of their liquedators. Some of the land is now being cleared to be converted to pasture.

Too much money. Where are the avenues for investment now that the family farms and businesses are gone (either that or they are merely overly-exploited small contractors to global big 'business').

Barkley Rosser said...

Brenda,

Important point to keep in mind. Nobody but the US has a debt ceiling or limit, none, certainly not any that I can find. Apparently Germany has a limit on annual budget deficits as a percent of GDP, but this is a number that can be hedged or fuzzed.

To answer your question, there is no reason to believe that abolishing the debt ceiling in the US will make it more likely to engage in some liquidity rampage than any other country that does not have a debt ceiling, which is everybody.

As it is, this debt ceiling is sort of like having mandated that you put away a gun in a drawer, and then periodically you pull the gun out of the drawer and debate whether or not you should shoot yourself in the foot. In the past, the decision to just put the gun back in the drawer has been trivial and straightforward, but with the upcoming situation it is very far from clear what is going to happen, and despite all the assurances from Geithnre and others, some major players seem to be playing chicken or hostage or whatever, with the S&P decision making some of them apparently ready to up the stakes. Given the centrality of the US and its debt in the global financial system, a default, which is what would happen withe a failure to raise the debt ceiling, would have enormous and very bad negative consequences for the world economy, which could make late 2008 look like a picnic.

BTW, I note that the original imposition of a debt ceiling was made by New England isolationist Puritans who did not like Woodrow Wilson or the US entering WW I, a time when a default by the US would have had essentially zero consequences for the rest of the world. Unfortunately, that is no longer the case.

TheTrucker said...

Republicans care nothing about a political economy that improves the prosperity of the people. What matters is stopping abortion and gay marriage. These are things that slow the growth of the population and the increase of economic rent that flows into the conservative coffers.

"Fascism, now and always, believes in holiness and in heroism; that is to say, in actions influenced by no economic motive, direct or indirect. And if the economic conception of history be denied, according to which theory men are no more than puppets, carried to and fro by the waves of chance, while the real directing forces are quite out of their control, it follows that the existence of an unchangeable and unchanging class-war is also denied - the natural progeny of the economic conception of history. And above all Fascism denies that class-war can be the preponderant force in the transformation of society.... "

fonestar said...

I am a foreign investor. The debt ceiling is just a red herring as far as I am concerned. It's pretty apparent to myself (and millions of Asian cash buyers) that not only the US but also the UK and Europe are insolvent.

So I say unto you wise men, hoard physical Gold and Silver, diamonds, Copper, Nickel and whatever else has any value. Anything but paper!