Debt Ceiling Kabuki: Republicans Will Cave and U.S. Government Finances Will Get Even Worse: News: The Independent Institute

Here we go again. Treasury Secretary Janet Yellen has warned that the federal government’s borrowing limit has been reached. Even with the Treasury taking “extraordinary measures,” the government’s ability to meet payments will be exhausted within months.

Leaders of the Republican-controlled House of Representatives said the House did not vote to raise the debt ceiling, which would have allowed more borrowing, without spending cuts. But White House and Democratic leaders reject that proposal.

Soon the bond markets will be in turmoil. Those who fear will raise the alarm that the United States will default on bond obligations and be unable to pay Social Security and Medicare.

The White House will bet that the standoff will hurt the opposition, which it will, and then a deal will be reached that, in essence, involves the GOP-led House capitulating while the White House and Democrats agree to pointless budget cuts (actually, cuts to planned increases, not real cuts) that, if realized, would change little in the grand scheme of things.

All this while the US balance sheet continues its descent into banana republic unviability.

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We’ve been here for a while. Nothing suggests that the current battle between the Republican House and the Democratic White House over the debt ceiling won’t follow a similar script.

To begin, let’s be clear about the risk of the United States defaulting on its debt. nothing. The United States can and will continue to borrow and grow its way out of debt pressures. Even without raising the debt ceiling (only possible in la-la land), the government can always prioritize its spending, just like you and I do, by servicing the debt and honoring its promises to the retired and elderly patients. Yes, it will have to withhold some other payments (that’s what prioritization is all about, right?), but it won’t default.

Let’s also be clear about something else. The need to borrow does not stem from the COVID-19 pandemic or the war in Ukraine. The deficit rose 12% from last year alone when it fell sharply from the previous year because politicians could no longer make a convincing case that extraordinary spending related to COVID was still necessary.

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Part of the increase is tied to rising interest rates. But blaming the Federal Reserve’s monetary tightening for the debt ceiling crisis is silly. The culprits are the fiscal expenditures that have long run the US deficit spending, resulting in astronomical debt accumulation.

Monetary policy, certainly, contributed greatly to the US government’s financial turmoil by keeping interest rates artificially low for more than a decade, making it look like the availability of greater amounts of Debt is a minor sin with minimal punishment.

The result of fiscal promiscuity and interest rate suppression is that the public debt since the start of the new millennium has risen from nearly $6 trillion to nearly $31 trillion, an increase of nearly six times the growth rate of payments interest.

This fiction will surely meet the truth sooner or later. That time is now—when the Fed needs to let interest rates rise to fight inflation.

The US government’s finances will get worse in the future, with interest costs expected to triple over the next ten years.

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Continuing to raise the debt ceiling while not doing anything meaningful about the unwieldy US government is why we find ourselves in the current situation. If we count entitlements, mandatory spending measures, the defense budget and interest expenses, there is very little over which Congress has any discretion (defense is politically untouchable, the rest is legal).

A person cannot pursue conflicting goals for a long time and expect consistent results. The welfare state, the warfare state and the Financially Responsible State are mutually exclusive propositions.

The US government long ago decided to pursue the first two and discard the third. It soon becomes clear that the other two are also incompatible—for, in the absence of a dominant sense of fiscal responsibility, there is no way to maintain those two behemoths.

The House GOP could seek significant spending cuts in exchange for raising the debt ceiling, but it will surely lose because, in the political game, nothing is what it seems. Especially the spending “deduction.” It’s still worth a try I guess.


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