Home » Why we're ungovernable » Why We’re Ungovernable, Part 6: Here Comes the Debt Ceiling

Why We’re Ungovernable, Part 6: Here Comes the Debt Ceiling

by John Rubino on January 5, 2013 · 21 comments

The fiscal cliff was always going to end with a whimper because that was the obvious path of least resistance. In the end, simply avoiding big tax increases and spending cuts while adding a few more trillion to the coming decade’s deficit was rewarded by the markets with a huge rally. Everybody went home happy, or at least still in possession of their political office.

Now we move on to the debt ceiling, which on the surface looks just like the fiscal cliff: A self-imposed set of penalties that can be finessed with the stroke of a pen. But it’s likely to be far messier, for a couple of reasons. First, the republicans got rolled in the fiscal cliff deal because they couldn’t stomach middle class tax increases and defense cuts. They were forced to raise taxes on their main contributors without cutting spending on the democrat base. This was a massive defeat for the supposed party of small government that cannot be repeated short of intra-party civil war.

The other reason is that simply raising the debt limit (for the umpteenth time) might actually have some political downside this time around because it requires admitting that Washington’s debt will rise by another $2 trillion in the next year or two, to around $18 trillion. The human mind doesn’t grasp “trillion” very easily, but it does get round numbers like 20, which is now rapidly approaching. Put that new handle in front of something incomprehensible but ominous like trillion – and then note that a decade ago it was below 10 — and you have, as they say within the Beltway, an optics problem.

The republicans can exploit this to demand spending cuts. The democrats will refuse on principal and counter with tax increases, and both sides will see a reasonable chance of blaming the other if the thing goes sour. So nothing will get done until checks actually stop being sent out. Here is the Wall Street Journal’s Kimberley Strassel on the republicans’ situation:

 

Strassel: The Debt-Ceiling Fight Will Be Dirty

The GOP thinks it will win, but the party’s strategy is far from clear.

In the classic movie “The Untouchables,” the street-smart cop Jim Malone explains to his golden-boy partner Eliot Ness that things will have to get dirty if they intend to bring down Al Capone: “You see what I’m saying is, what are you prepared to do?” That’s the question for the GOP as it sifts through the ashes of this week’s cliff deal.

The tax-hike extravaganza that President Obama signed on Wednesday was Round One of a bigger deficit fight, and the GOP was battered badly. Poor messaging, an internal tax feud, and a miscalculation of the president’s tactics—all combined to land the private economy with a monstrous tax bill, and the Republican Party with a black eye.

On to Round Two, which will center on the debt ceiling due to hit in February. Republicans are convinced they can win this one. Their thinking? The president can’t use the threat of higher middle-class taxes to force the GOP to yield. Without the middle class as a hostage in the negotiations, they believe, the debt-ceiling debate will be entirely on spending and Mr. Obama’s failure to confront the nation’s $16 trillion debt.

The White House feels this keenly, as exhibited by the ferocious threats the president leveled in the aftermath of his tax-increase victory. “If the Republicans think that I will finish the job of deficit reduction through spending cuts alone, that’s not how it’s going to work,” he said in a Monday press conference. Translation: He will demand more taxes.

The president is steeling himself for Round Two. Are Republicans? For all the happy talk about their leverage in the debt-ceiling fight, this is going to be dirty. What are they prepared to do? They face three big questions.

Question one: Do they mean it? In the abstract, the debt ceiling is a powerful tool for forcing the president to give in to spending cuts. The Obama Treasury can’t pay the bills without say-so from the Republican House, so the House holds all the cards.

In the non-abstract, failure to raise government borrowing limits means U.S. default—and with it potential credit downgrades, market panic and resulting economic distress. Is the GOP willing to inflict that on the economy? If Republican members instead run for cover, as they did with the cliff, the GOP will have been exposed as bluffers, and the administration will never again have to fear the debt ceiling. Republicans have to consider if they are willing to take that risk.

Question two: What do they want? Throughout the fiscal-cliff negotiations, the Republicans kept thinking Mr. Obama would sign on to entitlement reform, giving both parties political cover. In this vain hope, the GOP shrunk from laying out its specific demands on Medicare, Social Security and Medicaid.

President Obama didn’t bite, and he won’t in the future. The GOP must know by now that the president’s only goal is to water down any reform proposals. So their only chance of making a dent in the debt is to begin bold.

Do House Republicans have the courage to lay out big demands (say, premium support for Medicare or block grants for Medicaid), send a bill to the Senate, and sell entitlement reform to the public? If they can’t face the demagoguery that Democrats will use against them for making substantive proposals on entitlements, then they have already resigned themselves to piddling spending cuts that only nibble around the entitlement edges. Is that worth an epic showdown?

Question three: What other hostages are Republicans willing to see shot? Knowing he has lost his tax trump card, Mr. Obama seamlessly moved on this week to the defense budget. The cliff deal turns off the automatic sequester cuts to the military for only two months, and Mr. Obama intends to make further tax hikes the price for anything longer.

Are the GOP’s defense hawks willing to stomach those cuts as a price for entitlement reform? Having publicly campaigned against this slashing of the military, can the party stare down the president with a unified position? Mr. Obama is betting they can’t, which is precisely why he ensured in the cliff deal that the sequester kicks in at the very time of the debt-ceiling fight.

Only the GOP can answer these questions, but the point here is that Republicans had better have answered them—and clearly—before they step into the ring. The president has every intention of playing them exactly as he did in the cliff, and in 2011.

Mr. Obama will lay out tax-hike demands, give no quarter on spending, not waver and, as the deadline approaches, use his bully pulpit and the media to cow the GOP into the sort of wrangling that led to this week’s defeat.

If the Republican strategy isn’t crystal clear, if the party is again fractured, then Round Two is already Mr. Obama’s. So once again: What, exactly, is the GOP prepared to do?

Some thoughts
Now for the big picture question: why is all this happening? How did we morph from a somewhat functional country to one where debt rises in multi-trillion dollar chunks while the politicians who do the borrowing get reelected? The answer, as with so many other things, is the printing press. We’ve been able to simply borrow money and create new currency out of thin air for so many decades that as a society we’ve lost the impulse to prioritize. Instead, we simultaneously build a global military empire and a cradle to grave welfare state, and charge the excess cost to our grandkids. At the same time we develop an aristocracy of bankers and politicians who, because they get first crack at those newly-created dollars, have become all-powerful.

As a result both sides, left and right, see the other as having won. The left sees rapacious banks and corporations (the 1%) devastating broad sections of society while vacuuming up an ever-larger share of national wealth. The right sees ever-expanding entitlements and public sector unions crowding out wealth creators and turning the US into a socialist dictatorship (read France). Thanks to the magic of the printing press, they’re both right.

So here we are. Each side is so disgusted with the other that bipartisan compromise – which requires a degree of respect – is impossible. And even if it suddenly became possible, the imbalances are so huge that actually fixing the system by gutting both the military empire and the welfare state could never be sold to voters.

Fiscal policy, in short, is on auto pilot and the “off” button is disabled. Defense spending growth can be slowed a bit, but only a bit since the right still views the US as the world’s hyperpower and is willing to borrow whatever it takes to maintain this illusion. Entitlement spending can’t even be slowed, given the fact that baby boomers are retiring and have the political clout to guarantee free health care and nice monthly social security payments for the next three decades. No one, left or right, is brave enough to explain to my generation that its demands will bankrupt their grandkids. Add it all up, and US federal spending will rise by 8% a year until the market, not the voters, decides otherwise.

This puts all the pressure on monetary policy, the last relatively-pain free disaster-management tool. So here’s a prediction for the near future: After a few weeks of entertaining political theater, the debt ceiling will rise enough to get through the next congressional election. The Fed will continue to buy up most newly-issued Treasury paper but at some point will  begin making noises about ending QE. The markets will recoil (stocks will fall, revealing the massive underfunding of state and local pensions, among other things), and politicians will threaten the Fed’s independence. Ben Bernanke or his successor will see no choice but to oblige with more QE. See Japan in late 2012 for a template.

 

  • http://pulse.yahoo.com/_LJAZOLPOC45V3CCCHD25CCLASI The Sinick

    The voting public does not have the stomach nor the stamina to withstand the cuts that need to be made. And that aspect doesn’t even take into account the $greased palms in all of the industries that real budget cuts would adversely affect. This however, is all well known, if not understood at a gut level. What we should be talking about now are the trigger mechanisms that may bring our comeuppance to the fore. I have a couple: Installation of Patriot missile batteries in Turkey. The Soviets banning adoptions by Americans. Asian trading blocs deciding to exclude the U.S. and its plans for a Pan-Asia trading scheme. Continually sticking hot pokers in Iran’s eyes. I’m sure there’s more…

    • Joe Wazzzz

      Uhhhh? Can you say “Gun control”?

  • Tony D

    Brilliant analysis and summary, John !

    Everything is based on the path of least resistance until there is suddenly no more path.

    • pipefitter9_3

      It is starting to look like the great drought of 2012 will continue into 2013. Still a bit early to tell, but if so, this is probably the trigger that starts hyperinflation. Grain supplies are tight and cannot stand another poor harvest.

      However, even if the weather turns back toward normal, we’ll probably get hyperinflation in a year or two. If it were possible to run these types of deficits, for extended periods of time, politicians would have figured that out long ago.

  • http://profile.yahoo.com/J75TJPBXVQSCH4NABQB2KNHZ5E Rich

    I agree! This is all theatre. In the end they raise the debt ceiling – they always do. Heck, they may even celebrate it as a bipartisan accomplishment when it’s done. They came together and set their differences aside for the greater good of the entire planet! Watch out whenever they hold up bipartisanship in Washington. That’s when we are all really getting screwed.

    • Jim

      Yep, There’s the Republican stupid party and the Democrat evil party. When it’s stupid and evil,that’s called bipartisanship.

  • PaperIsPoverty

    Even if they understood the situation, Western leaders don’t have any choice anymore except to keep printing and monetizing. Otherwise they’d simply be replaced by someone who’s willing to print. The hyperinflation may be taking far longer than many rational people had expected, but it now seems more certain than ever.

    I disagree, though, with the idea that our grandkids will have to pay off our debts. It implies the system can continue for another generation or so and that fairly normal economic conditions — in which debts are actually repaid — will still be in place. To me that’s a very optimistic notion, because I think we’re facing a catastrophic reset where all debts will be wiped out through default or hyperinflation.

    And I think that in a not-quite-conscious way, it’s comforting to some boomers to think they can merely wring their hands over the fate of their grandchildren. The truth is, they will be more affected by economic collapse than any other generation because of their fixed incomes and the decimation of paper assets, which they own a lot of. The young, many of whom have major debts and no assets, will in some ways come out ahead. But everyone, infants to elderly, will suffer in a currency collapse. I guess I would say to boomers: Your grandkids will be fine, it’ll all be over long before that, but you better make sure you own metals or you’re screwed.

    • ReginaldTwardy

      I think John’s reference is in the vein of this familiar quote, often attributed (perhaps falsely) to Thomas Jefferson:

      “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered….”

    • http://www.facebook.com/douglas.m.green.1 Douglas M. Green

      Paperispoverty, VERY well said, and I’m glad it is the same generation or two who spent the money who pays the piper and not those too young to vote in defense of themselves.

    • Bruce C.

      Yes, well said.

    • welb2

      I must ask. If the dollar is worth nothing and you have bought gold at say $1600/oz then what will it be worth when nothing is – worth nothing???

  • grochef

    John,

    You mention the incomprehensible number of a trillion. I hear all sorts of really smart people say that the end is near as far as spending and printing go. But, is it? Why can’t they keep printing forever? I mean really! The Japanese government is in debt over 200 times its GDP. The US is only at 103 times. I really think that the politicians and the FED will continue paying their buddies forever. There is no paying it back. It is now only Monopoly money.

    • dick

      The difference with Japan; trade surplus in Japan, that finances the deficit and debt own by Japanese private citizens. In the US we have a trade deficit and the debt is own by the FED and foreigners. I don’t think that 200% of GDP will fly in the States.

      • http://www.facebook.com/douglas.m.green.1 Douglas M. Green

        Dick,
        Well said but Japan is now starting to have trade deficits and will soon experience the keynesian endgame where debt service payments consume all tax revenues. Also, our gubment may seize our retirement plans and force them into treasuries to buy it some time before we collapse.

  • ReginaldTwardy

    Everything can be distilled down to this nugget of truth: “Add it all up, and US federal spending will rise by 8% a year until the market, not the voters, decides otherwise.” The can will be kicked and kicked and kicked until the market takes that option away through rising interest rate demands for Treasury purchases caused by a loss of confidence. That’s one of several ‘end game’ possibilities. Another is that real inflation will make an appearance and cause rates to rise. Either way, this ends when interest rates go up significantly, since either the carrying costs will swamp the budget or the Fed will be forced to purchase virtually all issuance.

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  • WorkingClass

    Neither party will touch war spending or corporate welfare. That leaves reducing assistance to the poor, defaulting on pension obligations and raising taxes. Democrats and Republicans in the Imperial City are traitors and whores. They would not save us if they could. Only the utter and final collapse of the dollar will break their authoritarian rule.

  • Bruce C.

    JR presents a compelling explanation for the current state of affairs in claiming that the “printing press” (or debt monetization) is – and has been – the ultimate cause of reckless political behaviors (for decades), but I submit that that is actually a means (and not the only means) rather than the cause.

    That cause is that both political parties that constitute the US government are philosophically one in the same, and it is that philosophical basis that accepted, and accepted again, and then accepted a third time in 1913, central banking: debt-based fiat money and fractional reserve lending. Philosophically speaking, that means both parties believe in collectivism (or “statism” or “communism” or “fascism”, etc. – you pick the word, they’re all basically the same thing.)

    One has to distinguish the political parties themselves (and they ARE entities unto themselves) from those individuals (i.e., voters) who claim to agree with one political party or the other. There is quite a bit of reflexivity involved in that dynamic that often gets conflated. The media, and Kimberly S.’s analysis is a good example, tries to innocently bridge that gap. (I don’t believe most reporters/analysts in the popular media understand the dichotomy I’m trying to illustrate, so I don’t blame them personally.) She makes it seem that the “GOP” is actually fundamentally different than the Democratic Party, and that they care about you, and that their stupid logic and wimpy decisions are “for the good of the American people.”

    The truth is that both political parties are two sides of the same coin. The only difference now is that the Dems are in power and the Reps aren’t. Straussel’s analysis reveals that the Rep. party is just the other big government party that wants to be in power. They really don’t want to tear down the whole system via both lower taxes and less government spending. That is why they don’t want to discredit the US government by defaulting on its obligations, or being too specific in spending cut demands, or reducing military spending. That is why they are at a crucial disadvantage at this point in US politics. Paraphrasing from Ayn Rand’s book “Objectivist Epistemology” (I think), ‘Whenever both debaters share the same fundamental premises, the one who is most consistent with those premises will ultimately win the argument.’ Both sides believe in collectivism. That is their shared premise. Regardless of which party has won in the past the direction of government and policy has continued along the same trend line for at least the last century. However, the Dems are more consistent in their stated policies and objectives so they tend to win most of the “debates” and elections, especially now that collectivist thinking and policies have become mainstream.

    Some of you may think that I’m being overly cynical or paranoid or conspiratorial, but it’s actually a much more rational and consistent framework than that which is presented by the mass media. K. Straussel’s article requires you to accept very convoluted and immature logic. If, in JR’s words, the GOP couldn’t stomach middle class tax hikes or cuts in defense spending in the “fiscal cliff” dealings then how credible can their threat be to NOT raise the debt ceiling and stop ALL Treasury obligations? End of story. Obama, et al don’t need to concede anything, and won’t.

    So the GOP’s challenge is to regain power without destroying the framework of the system they want to control. Therefore they can not, and thus will not, insist upon anything that will actually reduce the size, scope and power of the Federal government, regardless of their platitudes or the desires of their constituents. One trick is for them to agree to higher taxes but to make it look like only the Dems insisted upon it. That way there is a chance that people will believe that if the Reps are in charge then taxes may go back down or at least not continue to rise. Another trick, which is even trickier, is to allow an increase in government spending at all levels while appearing both more compassionate and more fiscally responsible than the Dems. That will require separate messaging to separate constituencies so that everyone thinks they’re getting (or hearing) what they want and none of what they don’t want.

    THAT’s why we’re ungovernable.

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  • Bob

    What’s all this about a debt ‘Ceiling’?

    We all know that a credit card company issues you with a ‘Limit’ when you apply for a new card. Unless the lender then agrees to increase your ‘Limit’ (And you continue to spend) you eventually reach the ‘Ceiling’. At which point your line of credit ceases & you’re then required to pay down the amount owed, service the interest charged, or, go bankrupt (‘Default’ is such a sweet way of putting it).

    There is no ‘Ceiling’ to the US debt. Offering to cap the ‘Level’ of debt that the US government currently owes pays lip service only to the notion of some kind of ‘Ceiling’ or ‘Cap’.

    If I own the credit card company that lends myself money, and I also print the money that I have to pay myself back (And to those from which I purchase goods or services), the cycle can continue, ad infinitum.

    Add into the mix a privately owned banking cartel, that has vested interests in keeping the debt based currency alive, and money can literally fall from the skies if it means everyone stays indebted to tax slavery. ‘Helicopter Ben’ ring any bells?

    There will no doubt be some blowing out of cheeks, calls to prevent, debates to the contrary. However, in a few weeks time, the US Government will have its credit ‘Limit’ increased. Again.

    Move along. Nothing to see here……

  • redlion

    If we survive this,the generation of that time willsay”we must never forget this so it can never happen again.The americans that go through depression and who knows what will always remember the wicked polititians that put them there as the least generation.The key is pointing out our grandkids.


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