The Debt Ceiling, A Political Red Herring

As bipartisan efforts at a debt-ceiling deal failed yet again over the weekend, the American public are left with yet another false, albeit ideologically reinforcing, rift between political allegiances.  And as usual, the media mask the real issue at hand (the solvency of the United States government) with yet another political red herring (raising the debt ceiling).  President Obama’s July 25 address to the nation presented the two issues as one.  However, due in part to increasingly opposed political ideologies and a growing worry among market analysts, the idea that the U.S. may lose its AAA rating is now a major source of anxiety for many investors, and rightly so.

Despite all this, what is critical at this stage in the fiscal game is not whether to increase the U.S. debt threshold.  This is, in part, a political sideshow to conceal the insolvency of the federal government.  President Obama stated the routine nature of increasing the debt threshold, yet he did not explicitly acknowledge the insolvency of the federal government.  Instead, he talked politics and ideology to the American people to once again appeal to the sentiments that have increasingly defined a critically partisan Washington.  Consequently, the debt-ceiling issue, from the perspective of politicians, has become a last-ditch-effort at saving face with the American people.

Whether we want to see the writing on the wall or not, it is written clearly.  The U.S. is bankrupt.  Our defense spending has increased for decades and out-paces all other industrialized countries combined.  Entitlement spending is now at unmanageable levels.  And since the 2008 crisis, stimulus spending has added over $5 trillion to the national debt, with little tangible results for the taxpayer except the logical expectation of increased taxation and much smaller revenue streams.  Here are some numbers to consider.

  • “Official” national debt: $14.3 trillion
  • U.S. GDP: $14.7 trillion
  • Ratio of Debt to GDP: 97%

This, however, does not include the unfunded obligations from Social Security and Medicare that add up to a staggering $62 trillion.  In reality, some place the US debt-to-GDP ratio well above that of Greece, which sits at 143%.  According to Joel Bowman of the Daily Reckoning, this puts the individual on the hook for about $46K, $130K per taxpayer.  If we continue down this road of unlimited spending, our national debt could jump another $9 trillion to $22.9 trillion by 2015.  This is $70K per citizen, or almost $190k per taxpayer.  And the government wants to raise the debt ceiling.

The bottom line is that America cannot afford to continue spending at anywhere near its current levels.  Of course, this begs the question as to where cuts should come from, ushering in American political chicanery.  But the fundamental issue to those who see through the ponzi scheme that is money creation is that at its core, America needs a much more fiscally sound government.  Sean Egan, Managing Director of Egan-Jones Rating Co., stated recently:

…the big issue is adjusting the debt to GDP [ratio].  There are three problems in the United States.  One is that the debt to GDP is at 100 or so percent, compared to Canada, which is a true AAA, that’s at about 35%.  The second thing is that you have a dysfunctional government….we have three undeclared wars that have costs of $3 trillion.  The U.S. government’s debt has gone from $8 trillion to $14 trillion over the past five to six years.  Three of this [$3 trillion] is from undeclared wars, two of these [$2 trillion] is from the debt crisis that hasn’t been addressed.  We haven’t solved, we haven’t addressed what has gotten us into this difficulty to start with.

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As bipartisan efforts continue to fail in Washington, the reality of a U.S. credit downgrade becomes more poignant.  The Wall Street Journal acknowledged that many are starting to view a rise in the debt threshold as falling short of addressing the real issue.  “Moody’s Investors Service, Standard & Poor’s and Fitch Ratings have all warned they might cut the US credit rating.  S&P, in particular, has said it could move even if a debt-reduction deal is met and the $14.29 trillion federal debt ceiling is raised.”  It seems that the act of raising the debt ceiling, once deemed normal by politicians and investors, is now sending a signal of fiscal instability to many.  Kevin Williams had this to say:

The United States is not on a downgrade watch because the markets fear we won’t raise the debt ceiling in time to avoid a default; the United States is on a downgrade watch because the markets believe the debt-ceiling debate presents the last real opportunity for the government to enact a meaningful fiscal-reform program before it is well and truly too late to avoid a national crisis. The credit agencies, wisely or not, aren’t worried about the short-term political fight leading to an immediate default, but about the near- to medium-term fiscal situation, which is plainly unsustainable.

And this is the political red herring.  Although the U.S. has raised its debt-ceiling numerous times in the past, the implications that raising it now will fail to preserve the government’s credit rating suggests that the true issue is not the debt-ceiling, but an inadequate and fiscally over-extended government. 

 Average Americans will feel the effects perhaps the most.  Even a modest increase in interest rates resulting from a US credit downgrade will severely limit the government’s ability to pay down the national debt.    Moreover, a prolonged decrease in productivity will undoubtedly continue.  This could likely result in increased taxation, coupled with an already weak dollar and high unemployment rate, leading the average American to expect little in future earnings.  Consequently, savings for retirement and large purchases will decline, which will again target mainly middle class America, while the repercussions of decreased savings will detract from capital investments for future production.  This, in essence, is a death spiral for America.

From the politician’s viewpoint, the only solution left to the government is to stimulate the economy.  But this means printing more money (deficit spending), whence the call to raise the debt ceiling.  And the effects of that will be far more devastating to the average American than any politician or bureaucrat will publicly acknowledge.  While market analysts and rating agencies are beginning to see the US as perhaps a not-so-prudent bet, the market itself could very well dictate the movement of capital away from US shores.  The cause?  I would argue that depreciating any currency will always lead to decreased investment. Why invest in US business when dollars purchase less than other currencies?   When a nation creates its own currency out of thin air, i.e. without production regulating its creation and circulation, its value (how much it can buy, or its purchasing power) will only fall.  Joel Bowman has this to say of devaluing money via the printing press: “a money’s utility as a medium of exchange is directly proportionate to the amount of people who assign it value and, thereby, accept it as a store of wealth and facilitator of trade. To the extent that a money is easily reproducible, to the extent that it may be printed at whim or otherwise debased by the actions of central bankers, it loses its claim on the value to which we assign it.”  The essence of money relies not only on its ability to act as a universal medium of exchange, but on its ability to command a given amount (its value) in a market.  As this falls, so too does the prospect of investment by foreign and domestic investors.

These are the issues to consider, namely the effects of unlimited spending on the average American and the erosion of the monetary unit as a substantial medium of exchange by unsustainable fiscal and monetary policies.  The time for change is now, but raising the debt ceiling is irrelevant to money already spent and will prove inconsequential to the solvency and credibility of the United States government.

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About Jeremiah Dow
I have a B.S. in Politics, Philosophy, and Economics with a minor in Economics. I finished school in 2010 and am currently working on independent research in various areas including political and economic philosophy, government, and history. I am also currently looking for work in research, particularly the social sciences dealing with public policy work. I aspire to a top-level graduate institution, but would first prefer some professional research experience. Some of my primary influences are Ayn Rand, Noam Chomsky, and Howard Zinn among others.

5 Responses to The Debt Ceiling, A Political Red Herring

  1. Pingback: Big business groups finding they can’t put the Tea Party genie back in the bottle… « The Fifth Column

  2. Pingback: DEBT CEILING: Obama looses either way! « The STR

  3. Pingback: What is it About Economics…The Debt Deal Examined « kapitalcon

  4. Pingback: S&P Donwgrades U.S. Credit Rating to AA+ Amidst Shambled Debt Deal « kapitalcon

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