It’s time for a detailed note on the political circus in Washington DC gyrating over the debt ceiling.
I’ll begin with a provocation that may prompt some of my loyal readers to think I have crossed over to the dark side: The US debt ceiling does not matter. Not one jot.
Don’t get me wrong, a debt ceiling matters. It’s simply that the debt ceiling is not a ceiling.
The US debt ceiling has been an instrument of Congress for over 100 years. During that time, it has been raised over 90 times. It has never been reduced. As an economy grows, as measured by GDP, a rise in the nominal debt ceiling could easily be warranted.
Here is the history of US deficit spending as a percentage of GDP.
Hardly any surpluses. All those deficits represent the excess of spending over revenue. The shortfall is funded by borrowing. The accumulated borrowings equal the debt. The debt ceiling is meant to be a control on Government spending. Yet it is not. Here is a recent history of spending vs revenue.
The whopping increase in expenditures over the last three years have clearly been instrumental in the current debt ceiling crisis. And it gets worse. The Inflation Reduction Act passed by the Biden administration is another grotesque additional spendathon of crony capitalism. Here’s a recent story from the AFR about how Australians could get hold of some of the cash.
Back to Washington. Democrats and their supporters, being the legacy media, most large corporations, bankers and all the government agencies, are frantically pushing a line that the world could end if the Congress does not approve an increase in the debt ceiling. The spectacle is amusing. The world will not end. Remember, if there were no increase in the debt ceiling then expenditures would have to reduce to the level of revenue, ie a balanced budget. That would require several percentage points of reduced spending compared to GDP. That saving could be found easily without any question of defaulting on creditors, or stopping widows’ pensions. The histrionics are all political theatre.
To begin with, cut all those wacky green subsidies walking out the door to force an energy transition that few people want, which is not needed and will be damaging to the health and well being of everyone. Stop spending trillions of dollars on overseas wars that have no strategic value to the US. Stop funding corrupt supranational agencies such as the World Health Organisation. I could get the deficit cut in 10 minutes using nothing more than an executive order, a red pen and the words ‘pause’, ‘cut’ and ‘repeal’.
Therein lies the problem. The executive incumbent doesn’t want to do that. For him and his puppeteers, the debt ceiling is another opportunity for political gain.
A debt ceiling is an important constraint that the US doesn’t have. Instead, it has the debt ceiling, which is increased on a regular basis to accommodate on going deficits. A true ceiling has not yet emerged. Sooner or later it must do so. Only kooky adherents of Modern Monetary Theory believe otherwise. Who knows if this time the Congress does not agree to an increase and that a ceiling is finally reached. I hope so, because the longer it takes, the further down the road the can is kicked, the harder the inevitable crash will be.