The Paper Ceiling

The economic bellwether to watch this year is the US “Statutory Debt Limit”. Also known as the “debt ceiling,” it represents the limit the government may borrow to continue funding operations.

Breaking Through Barriers

The present limit was set at $14.3 trillion on February 12, 2010. Congress is considering another increase to accommodate spending which could press against the ceiling by April or May. Given the reliability of government estimates this could happen sooner rather than later.

Before 1917 Congress needed to specifically approve each debt issue. For efficiency, legislation was passed allowing debt to be issued funding government operations, provided total debt stayed within a prescribed ceiling—sort of like your credit card spending limit.

Congress has operated as many Americans who received automatic increases in their credit card charge limits: spending beyond their means and borrowing beyond their ability to repay.

When baby boomers were emerging from wombs across the fruited plain, the debt ceiling could be measured in mere billions. In the midst of World War II it went from $49 billion in 1940 to $259 billion in 1945—a five-fold increase. Historically, wars were the reason governments accumulated massive debts.

Currently, the trend appears to have the ceiling doubled every 7 years or so—almost entirely due to “entitlement” spending. The trend line plotted on a graph is nearly vertical, that is, unsustainable. Another way to comprehend the magnitude of the increase is to realize that the present ceiling is about 300 times what it was in 1940.

Why watch the statutory debt limit? It serves to illustrate the law of cause and effect, and more to the point, whether the members of Congress and the incumbent Administration understand this law.

The debt is ridiculously high for one simple reason: too much spending for too long, most notably since the inflationary 1970s and early 1980s. I contend that the global economy is in an extended historical period of inflation caused by the proliferation of welfare states. Unable to tax enough or control spending to prop up social commitments, these states resort to borrowing and some to monetizing debt.

The US has reached the point where it borrows as much as it spends. It has also added unprecedented amounts of liquidity to an economy confused by needless unemployment and mal-investments. It is the largest economy in the world and represents the world’s reserve currency. The US dollar is rapidly losing its status and the cause can be pinned on inflationary pressures from within.

As Congress dithers over insignificant spending cuts to its still unapproved 2011 budget more than 5 months into the fiscal year, the debt ceiling may become a bargaining chip. That is, Republicans might be persuaded to agree to an increase in the debt ceiling in exchange for something else—the arcane nature of such negotiating is excruciatingly tedious.

Congress has allowed the government to continue funding operations through “continuing resolutions” and is poised for another extension. Whether it will fund the operations for 2 weeks or 30 days is unimportant. A serious Congress would pass a damn budget for fiscal 2011 immediately with significant spending cuts.

The only way to solve the debt problem is to address spending, the root cause. It needs to be curtailed fast. Then Congress could move on to tackling even deeper cuts to the 2012 budget to show the American people that this government intends to balance its spending with its revenue.

Unfortunately, this is the kind of government Americans have wished for and got—a welfare-state hybrid mistakenly characterized as a provider. Such a state cannot work. The constraints on economic activity are so great that eventually, through actual cultural deterioration, the system no longer can function.

If the debt limit gets raised it will be a signal that the government can go on spending with limited restraint. Congress will, as it has repeatedly in the past, raise the ceiling one more time. They’re junkies. It is easier for them to borrow than to tax and/or stop spending.

Watch the Statutory Debt Limit. It will signal just how serious this Congress and the recently “shellacked” Administration are about being fiscally responsible and responsive to the voters in the last election.

©Copyright 2011 Edward Podritske

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