Friday, January 21, 2011

Homer Simpson, Cleavon Little and ‘The Debt Ceiling’

You are going to hear a lot about the so-called ‘Debt Ceiling’ between now and April so you might as well try to understand it before some politician tries to trick you into thinking it is something it is not, or worse than that, ‘not all that important’.

The first thought that came to our collective consciousness was the indelible image of the opening credits to the inimitable ‘Simpsons’ show where Homer is mishandling a spent nuclear rod with some tong clamps and throws it in the air and it goes down the back of his shirt.

Hidden meaning:

‘You don’t want to mess with it if you do not know what you are doing!’

Many House Republicans have been urging that the debt ceiling be used to ‘force’ Congress to vote on some of the tough spending decisions that have got to be made to lower federal spending and these ridiculously high budget deficits and insane national debt.

Why they don't just put on a vote-a-rama every day for the next 365 days and vote on the viability of every single federal program on the floor of the House is beyond us.  They could do that without ever tying it to the debt ceiling or the singing of the Star-Spangled Banner before the Super Bowl for that matter.

This somewhat artificially-manufactured 'crisis' argument mirrors the one expressed in such a serpentine manner by former WH Chief of Staff, Rahm Emanuel: ‘Never let a good crisis go to waste!’

Except that using the debt ceiling as a ‘crisis’ is almost self-defeating in its circular logic. ‘Let's hold a gun to our collective head in Congress (in the form of not raising the debt ceiling) and then we will stop doing all the spending…that is causing the debt to go up in the first place!’

That reminds us of a scene from 'Blazing Saddles' with the great Cleavon Little where he, as the new African-American sheriff in an all-white western town, threatens to take his own life in his own hands.  Think of Congress as 'Sheriff Bart' pulling out the 'debt-ceiling gun' on themselves.

(please excuse the non-PC nature of this clip but it does capture the essence of Congress using the debt ceiling vote to reduce spending and Mel Brooks and Cleavon Little were making a sardonic comedic point about the townspeople in a Mark Twainish sorta way)



(Love the nice lady when she says: 'Isn't anyone going to help that poor man?' Just like the American voter who keeps sending the same Congressman back to represent them year-after-year-after-year.)

So what is the ‘debt ceiling’ anyway?

The debt ceiling was established by the Second Liberty Bond Act of 1917. World War I-era legislation. Close to 100 years ago. That in and of itself should be enough evidence to convince you it is archaic, out-of-date and not really applicable to current modern practices and economic realities.

It is a very simple concept birthed under very simple circumstances. Previously, whenever Congress wanted, or needed, to raise money through the debt markets, they had to pass legislation to raise the debt limit for each individual issuance of bonds. With the passage of the Liberty Bond Act, Congress could set a higher limit for debt issuances and pass multiple spending bills that would not necessitate multiple increases in the ‘debt ceiling’.

What would happen if Congress repealed the ‘debt ceiling’? We do not know and no one else does either. Maybe we should try it; it would make each and every spending vote subject to raising the debt ceiling and NO Congressman or Senator wants to be on record for increasing the national debt over 2000 times per session of Congress. NONE of them, not even Barney Frank.

It might remove one ‘free’ vote per year for conservative Members to vote ‘against this monstrous debt ceiling bill!’ and then trumpet their bravery and 'conservatism' (sic) for the folks back home. All the while they are slashing taxes and increasing defense spending and special projects for their home district that is ‘not pork, but constituent service!’ These decisions all contribute to higher debt, not lower.

There is a question that we are doing some homework on about how Congress would be forced by previous law to deal with debt coming due or obligations in the form of contracts financed with debt. If true, and unless changed, this provision would basically mean every debt obligation would line up in order on the calendar and be paid until the money runs out. Which would be like in a few weeks. And then every program from defense to Social Security would be cut by over 30%, minimum.

But let’s assume that the debt ceiling stays as is. What would happen in April if Congress does not come to some compromise on spending reductions they want to attach to the debt ceiling being raised?

Immediately, like within nanoseconds, the entire federal budget process would shift to a ‘cash-based’ system. Meaning, any cash that comes in the door in the morning would get spent on only the top priorities in the afternoon.

We already know that interest on the already extant national debt of $9 trillion held by the public and foreign sovereigns will be paid. First. It has to or else we declare bankruptcy and the US greenback dollar will become as radioactive as the spent nuclear rod in Homer Simpson's shirt.

(Remember, the so-called SS debt of $5 trillion is entirely fictitious and has no economic value or reality according to the CBO. It will never be ‘paid back’ in the traditional sense of the words; it will be ‘paid’ by higher taxes on our children and/or lower SS benefits to us in our dotage)

Next, what do you think gets paid? Defense costs or Social Security? We think SS gets the nod here, to be paid in full because of the clout and fear of the AARP. They are more ‘scary’ to any Member of Congress than the terrorists overseas. Why? Because the AARP can get seniors to vote against incumbents to the tune of 44 million voters per election, that is why.

So out of every dollar, we will have paid about 12 cents for interest on the national debt; 28 cents on SS; 23 cents on defense and why not throw in the 21.4 cents on Medicare we know will never be cut for the reasons stated above?  And Medicaid…there’s another 10.5 cents right there.

On the night of the debt ceiling not being raised, 95 pennies out of every single dollar sent to the US federal government by your tax payments will be consumed by these 5 programs which, for all intents and purposes, are the ‘mandatory’ parts of the federal budget.

That leaves 5 pennies out of every tax dollar sent to Washington for all the other programs you might like and love: education; environmental protection; transportation and highway improvements; agriculture and food safety protection.

So, if you really want to ‘cut down the size of government’, allowing the debt ceiling to stay the same as it is today is one big way to do it. Assuming, of course, these same brave souls who vote not to raise the debt ceiling also stop voting for increases in any program, or decreases in any taxes, of importance to them and you.

And to top it off with a cherry, SS/Medicare/Medicaid will have to start getting Marine-style haircuts just so the inherent demographic growth in each program does not throw them over the debt ceiling in 2-3 years from now.

Cause if they don’t, worldwide economic chaos will ensue as the dollar crashes; US bond instruments are dumped like hot potatoes and the Chinese yuan gets a chance to prove its mettle as the new world reserve currency.

Other than that, it is a grand idea.

2 comments:

  1. I would love to know what the weighted average interest rate is that the US pays on its debt and how this changes in a rising interest rate environment. This information would help answer the question - "What happens to the 12 pennies paid as interest on our national debt when rates increase?" Does it go to 20 pennies, 30 pennies.

    Secondly, is it correct to look at the US government like the following? We generate about $2.5 trillion in annual tax revenue (2008 - lower in '09 and will be lower in '10, I assume) - our debt is $9 trillion (2010) (excluding Social Security). That means that we have a debt to revenue ratio conservatively estimated at 3.6 to 1 and with Social Security it is 5.6 to 1 ($14/2.5). This is debt to revenue, not debt to cash flow or earnings. Given consistent annual deficits we have no earnings for debt service and we keep rolling debt and interest over, refinancing and printing money which compounds the problem.

    If the above picture is accurate and if we were a company, the US would be in bankruptcy deciding whether it would be a reorganization (chapter 11 bankruptcy)or a complete liquidation (Chapter 7 - ie selling off assets to pay creditors).

    This is why major investors are betting against the dollar over the medium and longer runs. Short run bets against the dollar are interrupted by country risks (Europe, etc).

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  2. Oh my God! An entirely too rational of an argument here, Mr. 'Minor'!

    here's the real skunk in the Cobb salad: we did not have any 30-year bonds sold for a period of time in the late '90's/early 2000's when it looked like we were not going to need them any more. Why? 'Because we had balanced the budgets for 3 straight years! (Hallelujah!) from 1998-2000 and we actually PAID DOWN debt to the tune of about $800 billion from what I recall.

    so what did we go to? Lots and lots of 1-year; 3-year; 5-year; 7-year notes. all of which were issued in 2001/2002/2003 or so

    And then...the spending spigot was turned on. and the Bush tax cuts were passed. And the War(s) in Afghanistan and Iraq were engaged in, all under 'supplemental appropriations' spending mid-year which did not show up as deficit-increasers in the CBO official charts until AFTER they were passed, as opposed to putting them in the official budget at the beginning of the year where they could be legitimately scored and debated out in the open!

    and what happens when the 1/3/5/7 year bonds issued in 200-2003 come due? Like in 2011/2012/20133? They get rolled over and re-issued at the new prevailing interest rate.

    as long as we bounce along the bottom of the interest rate scale as we have done for the past 3 recession-laden years, it doesn't 'hurt us' that badly. But if the weighted average, as you say, is now only 2%? 3%? heck, make it a very high 4%....what do you think happens to these debt charges when 'normalcy' returns?

    Interest rate sensitivity studies have been done at CBO to this effect...and I think the most conservative number I saw was that interest costs on the national debt go to $1 trillion....per year....immediately like when the average interest rate goes to 5/6/7%

    and if it goes to the astronomical levels of the early 1980's when the prime rate was around 15% and some mortgage and commercial interest loan rates got to 21%.......oh my goodness.

    You are way too intelligent and rational to be taking a look at the federal budget in such a coherent manner. Go drink some stiff martinis and eat some hallucenogenic mushrooms and come back and analyze it like it should be...like through the eyes of Lewis Carroll when he wrote 'Alice in Wonderland'.

    Cause that is how the federal budget is 'really run'.

    seriously...honest to God.

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