Now, I admit, one could probably come up with quite a list of potential candidates for this question and they would all be really stupid things to do. But the one at the top of my list would have to be raising the debt limit. When you consider the options the GOP has before it when it comes to making meaningful spending cuts to fulfill their campaign promises, this is a golden opportunity. It just doesn’t get any better than this.
The fear mongers, including some on the right, are trumpeting a financial calamity if the debt limit is not raised. Nothing could be further from the truth. Let’s take a look at what’s really involved rather than the rhetoric.
If the debt limit is not raised, Congress gets its credit card restricted. They can’t continue to recklessly throw away taxpayers money, at least to a point. Since over 50% of our spending is with debt money borrowed from foreign sources like China and Japan, virtually all of Obama’s agenda items are funded this way. The debt limit is the perfect tool to put his agenda in check and force some priority decisions.
The sky does not fall if we don’t increase the limit. It would if we didn’t do the proper things along with it. First would be to pass the law being floated around through Congress right now. It would require our Federal debt interest and debt principal to be paid first. As it should be. Principal payments on our debt are really a non-factor. A principal payment is simply re-issuing a debt bond once it expires. Purchasers of our debt buy bonds to finance the spending habits of our illustrious members of Congress. These come in varying lengths of time before they mature and can either be cashed in or simply “rolled over” into a new bond. This is normally what occurs, thus we don’t have to face the prospect of making these “principal payments”. Only if there were a “run” on cashing these bonds in caused by a variety of factors would this become a problem. This will likely occur eventually if we continue on the same path and foreign investors see our bonds as risky due to our debt to GDP ratio. But it hasn’t hit yet and for this particular vote on raising the debt limit, it isn’t an issue.
The Fed has been keeping the interest rates they charge banks at near zero rates as they continue with their manipulation of our money supply. A benefit, if you will, is that the low-interest rate dividends paid out on those bonds is very low accordingly. This serves to keep our federal debt interest amount relatively low. Once Bernanke recognizes the threat of inflation is real and begins to raise those rates, our debt interest payments will rise correspondingly as the debt bond owners roll over their bonds that mature into new ones with higher interest rate dividends.
As you can see, inflation is the key factor here. The Fed has a policy that actually encourages inflation with a target of 2% annually. That’s a problem in and of itself, but is best left for another post. However, the Fed ignores energy and food prices in its analysis of price inflation. This is, of course, ridiculous as those affect us more than anything in our daily lives. But it is what it is. The point is that curbing any excessive rise in inflation will be the trigger that forces Bernanke to raise those rates and thus will result in our debt interest payments rising.
Eventually, this will become a major issue as the debt interest payments will consume an ever greater percentage of our tax revenue annually. This is why we must act NOW to reduce spending. If they pass the law requiring the debt interest to be paid first, there will be no epic crisis as Geithner, Goolsbee and others have proclaimed. The crisis will be from not being able to continue funding of discretionary items. The bond rating of our country will not be cut if we address the interest payments.
The fact is that it is far more perilous and destructive to our country’s future if we continue the spending. Eventually, those massive debt interest payments are coming our way, and we must reduce our debt exposure now to minimize the effects on future budgets. There is no practical way to eliminate the debt short of default and obviously that is not a reasonable option. But we can eliminate unconstitutional spending and reduce other discretionary spending and start in the right direction.
If the debt limit is not raised, Congress will be forced to address its spending priorities right NOW. Not some supposedly well-intentioned plan for the future. This was what the mid-terms were all about. It is what the tea party is all about. Everybody wants spending reduced. This is without question the best opportunity the GOP will see in the Obama era to do it. Instead, we see the GOP bargaining and talking about trade-offs with the left for a yes vote on the debt limit. They should absolutely take a hard-line here and refuse to raise it. Why look a gift horse in the mouth? Of course, Obama has all his talking heads out there proclaiming that the world will end if we don’t pass it because that’s in his best interests. He must continue with the excess spending to get his agenda implemented. This is so easy.
Will they do it? Likely not. The GOP will almost certainly make some compromise deal they can promote as progress and pass the debt limit raise anyway. In fact, Speaker Boehner was just on Fox yesterday saying essentially that. He made the point that it would be disastrous for our nation, even the globe, if we don’t raise the limit. In essence, has already laid his hand on the table and told Obama that he will cave because we cannot afford not to. Obama now knows that he doesn’t have to concede much more than lip service to make both sides have the ability to claim victory. The Washington spending machine will march on.
I’m sure some of you will hold out hope and wait to see what happens first and give the GOP a chance. Suit yourself. What will you “hope” for after this failure?