Budget Wars: As the Lemmings Approach the Cliff

Before I get to the facts about the debt ceiling, we have this report from our embedded reporter, John Stewart, as he accompanies the President of the Lemmings aboard his flag ship, The Death Spiral.  Our reporter indicates the President wants to lead his faithful lemmings off the cliff in an effort to “Win The Future”.

 

As We Head Toward the Cliff

No doubt, those paying attention to the debt ceiling debate can get plenty of information from all over the internet. Here, I want to touch on three topics.

First: How has America’s debt increased over the last ten years? The following chart demonstrates that our debt has gone from just under $6 trillion to over $14 trillion.

Second, in recent years, the Fed has been purchasing about 70% of our debt. The debt is issued in the form of treasury bills. The Fed doesn’t purchase Treasury Bills directly from the Treasury Department. Instead, Fed Chairman Ben Bernake will place an order with the Fed’s “primary dealers through a series of competitive auctions operated through the Desk’s FedTrade system.” These “primary dealers” include such companies as Goldmen Sachs, Morgan Stanley, the Deutsche Bank of Germany, and 15 others. These companies purchase the Treasury Bills at a private sale, and then turn around and sell them to the Fed with a small percentage markup. Of course, even a few tenths of a percentage point mark up on billions of dollars in Treasury bills results in millions of dollars in bonuses for these companies.

As a consequence, companies like Goldman Sachs (where former Clinton Treasury Secretary Robert Rubin, and former Bush Treasury Secretary Hank Paulson, work) are guaranteed a sure profit. This is why purchases of US Treasuries by the Fed have grown from just 10% of all Treasury sales to about 70%, as the accompanying chart demonstrates:

Here’s my analogy to this: A husband writes his wife a Cashiers Check for $100 drawn from money in their joint checking account. She then takes it to the bank to first cash the check and then put the money BACK in their joint checking account and log that as not only covering the cost of the money order, but as a net INCREASE in their checking balance of $100.

No one in their right mind would do that. The government shouldn’t do that either.

 Third, no one really knows what we should do, and what happens if we fail to raise the debt ceiling. The following from a recent PBS Newshour on May 16^th illustrates this point:

RAY SUAREZ: On one side of the argument, people from the administration are promising calamity if Aug. 2 comes and goes with no settlement for this, while some on the other side are saying, well it’s a detail. It’s — we will miss a couple of payments for a couple of days or a couple of weeks, but then, eventually, this will get settled.

Is the truth somewhere in the middle?

BINYAMIN APPELBAUM: We don’t know. You know, I think Robert Rubin, the former treasury secretary, said it best. He said, we don’t know what will happen, but why would you want to find out? And that seems to be, you know, a perspective that certainly all of our former treasury secretaries have, that you’re wandering off into an unknown space. There is no telling how markets would respond if the government stops paying some of its bills. Some people are willing to run that experiment. Others fear it greatly and don’t want to. But we really won’t know until, if and when we get there.

From this, I conclude that we should raise the debt ceiling, but only under the following 3 conditions:

1. We extract significant cuts in spending, either based on what Paul Ryan has indicated, or the Debt Commission’s requirements, or some combination thereof.

2. We create long term balance for our federal budget, including a balanced budget amendment and tax restructuring.

3. We enact a prohibition on the Fed using the Treasury Arbitrage system to continue monetarizing the debt. It make no sense for us to purchase our own debt, and prevents us from having an honest discussion on budget priorities in Washington.

If we don’t do these things, we might as well all become lemmings and look for a cliff to jump off from.

 

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