Monday, May 16, 2011

What To Do If The Debt Ceiling Is Not Raised? Ignore It

We are indeed approaching an unprecedented situation. As I have repeatedly pointed out, the US is the only nation ever to have a nominal debt ceiling, long ignored as a trivial matter since its imposition in 1917, given the routine way it has been raised so many times previously. But now we approach a battle royal, where House Republicans refuse to allow for any tax increases as part of any deficit reduction deal, and it would be extremely unwise of Obama or the Dems to agree to the more radical of their demands for spending cuts, including the fact that the only way they can defeat Obama next year is if they can engender a financial crisis leading to a return to a recession, which they can then blame on him. And if he is foolish enough to let them do that, well, then he may deserve not to be reelected.

So, my proposal is that if the Congress is unable to come to some sort of reasonable deal that will allow a vote on raising the debt ceiling, Treasury Secretary Geithner should simply ignore the debt ceiling and continue to pay the bills as they come in, thereby avoiding any defaults or spending cuts or financial crises. The fact is, in the absence of any direct instructions from the Congress on which bills should be paid and which should not be in the face of crashing into the debt ceiling (surely we are not talking about paying no bills at all), he has no authority not to follow the instructions of the Congress in its latest budget, and spend what has been mandated. That will be the last coherent instruction from the Congress, and I say he should obey that in the absence of anything else more specific. Indeed, it will be the only responsible thing to do.

Now, many might complain that "the law is not being obeyed." Well, yes, and I think that is too bad. But many laws fail to get enforced. The last administration clearly broke our laws against engaging in torture, but they were not and are not being punished, although supposedly we are torturing no more now. About half the states have anti-adultery laws, but the only case I am aware of within decades of any of them being enforced was an absurd one near me in Luray, Virginia, where a district attorney was arrested for it after his mistress turned him in, testifying against him. He had been stupid enough to cheat on this mistress, but it was for cheating on his wife that he was officially put away.

As it is, this debt ceiling limit, not in force in a form like ours anywhere else (The EU has rules tied to percent of GDP, 60%, but never enforced with some countries in permanent violation, e.g. Belgium), is a stupid law anyway, like those laws against adultery. It should simply be ignored, the sooner the better, so as to render it irrelevant. Tea baggers may bring lawsuits, but who is going to arrest the Treasury Secretary? Will a court have the nerve to start making specific rulings about what should be cut and what should not be cut, or what taxes should be raised to meet the debt ceiling? No.

My main regret is that this charade will move us ever that closer to becoming a banana republic. But, if it comes about, it will be because we have banana Republicans in the House of Representatives.


Stephan said...

Very good idea! This debt ceiling issue is only ridiculous. I've the impression some of these tea party politicians have missed some (all?) major monetary changes which happened in the 20th century. They seem to think there are secret places in the US where the federal government digs up US$ from mother earth and thus availability of US$ is limited by the federal mining capacity.

In regard to a previous post about the debt ceiling I owe you an answer. You are right. The US is the only place with debt ceiling which is a nominal amount of aggregate debt I'm aware off. The Swiss debt break aims for a balanced budget over the business cycle. They have a quite sophisticated system in place based on Hodrick-Prescott-Filters to do the math. The German debt break goes one step further and separates the deficit into its structural and cyclical component. The structural deficit must be below 0.35% of GDP. The cyclical deficit must be balanced over the business cycle. I stand corrected.

That said I think this deficit voodoo economics is a very stupid idea. For example it does not consider the saving decisions of the private sector. The Germans are saving like a major medical breakthrough is imminent. These savings are a leakage from the aggregate income stream. German growth is thus only sustainable with a current account surplus making up for this leakage.

Don Levit said...

I think we need a Regulator in a fiat economy in which no one is accountable to anyone except his own reelection.
The debt ceiling provides the brakes we need to keep us from careening out of control, even more.
Geithner said he would redeem the Treasuries in the federal employees' retirement funds to help pay the bills.
How does one redeem IOUs with IOUs?
The numbers in the federal retirees' trust funds are the same numbers in the SS trust funds. In each case, instead of liquidating assets to pay benefits, the trust fund must raise new money whenever it is tapped.
It is important to have a debt ceiling when we have these shenanigans going on.
I can provide governmental links and excerpts that reveal the true nature of the federal retirees' trust funds.
Don Levit

TheTrucker said...

The United States government (The Treasury) has the constitutional authority to coin money. The US Treasury can MINT one or more coins placing whatever face value is desired on those coins and deposit them at the FED. That pays the bills with no further borrowing. If you don't like the inflation then raise the taxes or stop making war all over the planet. SS is OFF BUDGET and not part of the problem. "Medicare Buy In" can easily fix what is amiss in Medicare. Tying these to the "debt limit" is lying at its finest from our Republican liars.

Gene said...

This is not a bad idea. Most markets are still not panicking over the debt's become more of a political discussion than an actual economic issue, don't you think?

Gene Marks

Jack said...

Isn't ignoring the "debt ceiling" fundamentally the same as the Tea Party types are demanding? except they have no idea of the supposed next step when the "ceiling" is reached. Unfortunately ignoring the debt level may result in the Executive and Treasury Secty making some arbitrary decisions regarding what bills to pay first and/or in full. Is there anything stopping Obama and Geithner from deciding that SS payments will suddenly be cut by 15%? Same for any other bills that come due. How about the possibility of Treasury simply declaring a call on all outstanding T-Bills to be replaced by notes paying .000001%, and extended out to 50 years?

Just wondering who has the authority to do what once they start screwing around with thee budget from the payment due side of the ledger?

Barkley Rosser said...


I am asking for them not to do what you are afraid of. Just keep on paying the bills as they come in, those that have been authorized by Congress in its last budget passed, and keep on issuing securities (borrowing) to cover any deficits, even as the debt total moves on up above the ceiling.

TheTrucker said...


Whereas, the executive is constitutionally bound to enforce the laws on the books (spending); and whereas, the executive (Treasury) cannot fail to enforce the current appropriations mandated by the congress, then at this point, the executive can choose what to fund from various means and what not to fund. The congress has the power of impeachment should it not agree with the selected spending of the executive.

TheTrucker said...

In 1941:

"..., Roosevelt issued an executive order to tax all income over $25,000 at the astonishing rate of 100 percent. He also promoted the lowering of the personal exemption to only $600, a tactic that pushed most American families into paying at least some income tax for the first time. Shortly thereafter, Congress rescinded the executive order, but went along with the reduction of the personal exemption.[41]

The congress _DID_ however raise the top rate on extreme income and that legislation was signed by the pres.

What matters here is that a national emergency that threatens the current institutions of government warrants executive orders. And those orders must then be RESCINDED by acts of congress via joint resolution. The War Powers Act clarifies this situation by stating that the president cannot VETO a joint resolution of congress that RESCINDS an executive decision instituted in times of crisis.

The budget passed by the NEW congress and signed into law by the president supersedes the "debt limit" legislation from the last legislative session. And there should be an "executive order" clarifying that reality.