Thursday, November 15, 2012

Can Borrowing From Abroad Avoid The Debt Ceilinlg?

No, but Allan Sloan in the Washington Post today thinks it can, or maybe it can.  He proposes that Treasury borrow $200 billion in US government securities from China to use to continue to pay bills if we hit the ceiling, thereby supposedly overcoming dumb gridlocks that should not be happening and have led to such stupidities as the current "fiscal cliff."  Sloan modestly calls this the "Sloan Strategem" (Ahem, rule against people naming things for themselves holds here, ahem!)

But the answer is no.  Treasury already has a bunch of delaying mechanisms that hold off the moment of truth for several weeks.  We saw that in 2011, when we breezed past technical bankruptcy in June only to fact it in early Augusst when the fiscal cliff got cooked up.  This device would only add some other arbitrary amount of time that would simply delay the moment of blackmail reckoning.

The answer is to abolish the debt ceiling.  People ranging from Bill Clinton through Bruce Bartlett to me and a lot of others have argued that the debt ceiling is unconstitutional on multiple grounds, quite aside from being bizarre and self-contradictory, actually incoherent.  Obama should bite the bullet when it next comes really due, and declare it unconstitutional.  I bet the markets will go up if he does so, although there will of course be a Supreme Court case on the matter.  But better to fight that fight than to be set up to constantly have to deal with these blackmail threats that the House Tea Partiers have made it clear they will continue to impose repeatedly, no matter what comes out of the current fiscal cliff negotiations, which may well be things that voters most definitely did not vote for in this recent election and should not be put into place.


Ralph Musgrave said...

Abolish the debt ceiling? Here’s a better idea: abolish debt. I.e. what on Earth is the point of the government / central bank machine borrowing the stuff (i.e. money) which it can produce itself for free?

Milton Friedman advocated a monetary system where there is no government debt, as does Warren Mosler.

TheTrucker said...

The Treasury can issue platinum coins containing $100 of platinum with a face value of $100B. Deposit the coins as a way to force the FED to "give up" the treasuries on the books of the FED.

Of course, the FED could just throw gasoline on those bills and notes and light em. We will call it QE 99.

The Treasury cannot sell T-Bills to the FED because the congress says so. The gummint must sell the notes to the Wall Street Weasels and the Fed then buys from the Weasels. Unfortunately, the treasuries sitting on the books of the FED are still counted as part of the national debt and thus subject to the "debt limit". Ridiculous!

Don Levit said...

You are proposing we abolish debt.
Isn't debt the opposite of equity? So, if we were to abolish debt, we would have to abolish equity.
How do you get around the time-honored principle of there being 2 distinct parties to certain transactions: a borrower and a lender.
Who is the borrower and who is the lender in your thinking?
Or, is there simply a Creator?
Don Levit

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TheTrucker said...

When we say "abolish debt" most of us mean to stop selling treasuries to the public, and instead just get the money from the FED directly. The "value" of the money is still based on the need to "pay back the loan". The treasury + FED created a loan to build a battleship at the request of the people. The people bought a battleship on credit. And the taxes are the repayment of the loan. The taxes must be just sufficient to keep serious inflation at bay.

Why is thus so difficult to understand? It is the same as a bank loan process. In either case it is government enforcement of the loan contract that gives the created money any value.

Don Levit said...

"The Treasury + Fed created a loan.'
Here is the problem, as I see it, Trucker.
The Treasury and the Fed, for aLL INTENTS AND PURPOSES, ARE INTRAGOVERNMENTAL AGENCIES. IT is like the left pocket is borrowing from the right pocket.
A valid loan is created between 2 distinct,independent parties, not from the request of a third party. Each party has a valid reason to create an asset and a liability. In practice, your suggestion is no difFerent thaN the Treasury borrowing from the sS trust fund. What prevents the Treasury, in your example, from borrowing from the Fed to pay for current expenses, not specifically directed to battleships?
What ensures the dollars are intact and liquid, pre-paid to liquidate to pay for the battleship without the use of new general revenues?
Don Levit

Barkley Rosser said...

Let me be clear here. I am not for pretending that there is no such thing as debt, nor am I advocating wildly expanding the debt without paying any attention to its relation to GDP, or more importantly the relation of interest payments on it to GDP, not to mention such matters as how much is owed abroad. Far from it.

I am for abolishing the debt ceiling, which I remind everybody is completely unique in world history to the US, dating originally from 1917. Other nations have percent of GDP guidelines or targets, but no other nation has had a binding nominal debt ceiling. This is an absurdity that puts the US governmnet in the position of potentially being unable to avoid breaking the law, as it must pay legally approved bills due, but the ceiling would say it cannot do so if enforced. Plenty of nations have had perfectly responsible fiscal policies without this nonsense and stupidity. It is simply insane and should be abolished.

Tom Hickey said...

Don Levit, the US government does not borrow to finance itself, nor do taxes fund government. This is a myth. Read Warren Mosler's Seven Deadly Innocent Frauds of Economic Policy and Soft Currency Economics, free downloads at and a buck on Kindle at Amazon.

Don Levit said...

I read an excerpt today from Warren Mosler, that said something to this effect: reducing government debt is as easy as adding keystrokes to the private sector and subtracting keystrokes from the public sector.
That's enough for me, thank you.
Don Levit

TheTrucker said...

Dear Mr. Levit:

You seem to have missed the point. The government does not borrow to finance the wages of the government. The government borrows to do the will of the people. It is no different from the people deciding to buy a car or to order Chinese food. The people, through their representatives, ordered a battleship (or whatever else the congress is spending on) and the taxes are the bill for that which was ordered.

All money is based on this loan process whether the government does it or the private banks do it. The money has value because LAW insists on repayment. If government spends and does not tax then the money loses value and there is inflation.