An Argument For the Debt Ceiling
By Lance Roberts, CEO, StreetTalk Advisors
As we rapidly approach the great “debt ceiling debate,” of which we are told that we should“rise above,” there has been a rising chorus of arguments for ways to get around the debt ceiling, such as the platinum coin idea, as well as utilizing the 14th Amendment. There have also been numerous comments made that the debt ceiling should be disposed of entirely.
The idea of the “Trillion Dollar Coin,” or utilizing the 14th Amendment, are just simply bad ideas that should be dismissed immediately. I say they are “bad ideas” because the last thing that we need, as a country, is an Administration that is trying to find ways to circumvent the law. As such I want to focus my comments today on the later argument for disposing of the debt ceiling entirely.
To fully understand my argument for WHY we should maintain the debt ceiling it is important to understand what it actually is and is not.
The U.S. public debt is the money borrowed by the Federal Government through the issuance of securities (bonds) by the Treasury.
There are two components of public debt:
- Debt held by the public - these are bonds issued by the Treasury that are held by individuals, corporations, the Federal Reserve and foreign, state and local governments.
- Debt held by the government accounts - this includes non-marketable Treasury securities held in accounts administered by the federal government that are owed to program beneficiaries such as the Social Security Trust Fund.
Public debt increases, or decreases, as a result of the annual unified budget deficit or surplus (the difference between revenues and expenses and ignoring intra-governmental transfers.)
Under Article I Section 8 of the U.S. Constitution, Congress has the sole power to borrow money on the credit of the United States.
From the founding of the United States until 1917 Congress directly authorized each debt issuance separeately.
In order to more easily finance the WWI war effort Congress passed the Second Liberty Bond Act in 1917 which established an “aggregate limit” or “ceiling” on the total amount of borrowing that could be done.
The current debt ceiling was substantially established by the Public Debt Actswhere were passed in 1939 and 1941.
Under these acts the Treasury is authorized to issue debt needed to fund government operations AS AUTHORIZED BY EACH FEDERAL BUDGET up the a stated debt ceiling.
The U.S. President is supposed to propose a federal budget every year. This budget details projected tax collections and outlays and, if there is a budget deficit, the amount of borrowing the President is proposing in that fiscal year.Congress creates specific appropriation bills which authorize spending, which are signed into law by the President.
A vote to increase the debt ceiling is, therefore, usually treated as a formality,needed to continue spending that has already been approved previously by the Congress and the President. The Government Accountability Office (GAO) explains: ”The debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred.”
It is the apparent redundancy of the debt ceiling which has led to suggestions that it should be abolished. Why would you need a debt ceiling if the Congress and the President have already agreed on a set amount of spending for the upcoming year? If the current government was operating normally I would likely be inclined to agree.
However, that is not the case that we find ourselves in today. It was the foresight of our founding fathers, that had witnessed their previous government run itself into financial ruin, who required a check and balance system be put into place to ensure that the government operated with some fiscal constraints. It is within this check and balance system where the“debt ceiling” plays a crucial role.
The current Administration has NOT PROPOSED, nor has Congress PASSED, a budget in the last four years. Furthermore, the current Administration, and the Senate, have stated that they have NO INTENTION of passing a budget in the next four years. It is within this irresponsible behavior that the debt ceiling comes into effect. Yet over the past 4 years the debt ceiling has been raised 6 times.
The Federal budget process, as stated above, is what establishes the amount of spending that is APPROVED through the constitutional process, however, WITHOUT a budget how is the debt celing supposed be established? How much more debt should the government issue? $1 Trillion? $2 Trillion? Without a budget and without some constraint on debt issuance it becomes a spending “free-for-all.” The current debt ceiling debate should be a wake up call that the current government is broken. A repeal of the debt ceiling, or worse yet a work around with the coinage idea or invoking the 14th amendment, is the realization of our founding father’s worst nightmare – a government that has become fiscally irresponsible.
Do we need the debt ceiling and its current debate? You bet. In my opinion the argument over the debt ceiling does several things:
- It raises public awareness to the fiscal issues surrounding our economy;
- It exposes many of the elected officials to public scrutiny and may force them act more responsibly if they want to be re-elected.
- It at least ensures that there will be a discussion, although not necessarily fruitful, over the issues of spending, revenues and debt.
Will the debt ceiling be raised? Of course it will. However, it should be remembered that despite the threats from the media, and the Administration, that failure to raise the debt ceiling would result in a catastrophic default of our debt – there have been two previous shutdowns of the government in past. In 1995 and 1996 the U.S. federal government was shut down as the result of conflicts between the Clinton administration and Congress over the funding for Medicare, education, the environment and public health. Subsequently, the government was shut down after President Clinton vetoed the spending bill set forth by the then Republican controlled Congress.
The important point here is that the Government did NOT default on its debt obligations. Government workers were furloughed and non-essential government services were suspended until a budget agreement was reached. This is the way that it should work now.
What should not be done is to try to find a way to circumvent a very important process. As I stated in yesterday’s post it is indeed time for our government officials to ”Rise Above” the debt ceiling debate, pass a budget, raise the debt ceiling accordingly and begin to function according to the Constitutional laws, and foundations, around which this country was established. Anything less is simply shameful.
34 Comments
Cullen, I understand that you like exposing diverse views, but come on, a bunch of bullshit like that?
I’ve been screaming about how the debt ceiling is stupid for years on end. I don’t agree with Lance’s position, but I think it’s fair to offer the other side of the argument….Sorry you disagree.
Just seems the other side of the argument is ‘the earth is flat.’
Very nice article, Cullen. Thanks for posting.
Now, can someone please show me where that limit is on the chart, I can’t seem to find it. lol
I really appreciate you posting the other side of the story Cullen. But I have to agree with Peter. This article is pure BS. The debt ceiling is a stupid self imposed constraint that Republicans are now abusing because they don’t understand the monetary system. It’s shameful that they’re using this fake law to force cuts at a time when there is no inflation and no signs of insolvency. Their story falls flat on its face no matter how you phrase it. But they scare people with this incorrect notion that we’ve run out of money. I am sick and tired of it. They lost the election. No one buys their BS any more. It’s all theater. They need to stop lying to people’s faces and start trying to build an argument that people might believe as opposed to just scaring ignorant Americans into believing we’ve run out of money.
Great article. Thanks for posting it. I agree with everything it says. I am sorry to say most of your readers must not have much at stake, since they seem to be in constant favor of unlimited governement spending without any restraint whatsoever.
Where did anyone say anything about unlimited spending?
Cullen, is this article even accurate? The author points out that the government was shut down in the 1990s, but that wasn’t the result of a debt ceiling fight was it? We never defaulted back then, correct? I really don’t understand what happened in the 90s vs this debt ceiling business, but I did see an interview with Newt Gingrich (who was right there in the middle of the 90′s shutdown!) on one of the Sunday news shows, saying that he thought the Republicans should NOT make a fuss about the debt ceiling… but rather the “continuing resolution” fight which comes later on… and through which they could force a shutdown if they wanted. So is that what Gingrich and GOP did in the 90′s? A shutdown during a “continuing resolution” fight? If that’s the case, then the author either doesn’t understand the difference, or he’s intentionally being misleading by conflating these two different fights.
I’ve learned a lot here, and think I mostly understand MR. Unfortunately, I think you are missing the point of the debt ceiling. This is NOT about money, it’s about power. The coin, 14th, or eliminating the debt ceiling would significantly change the balance of power between the legislative and executive branch.
article 1 of the constitution lays out a process for government spending. The “power of the purse” is what congress uses to end wars. I am extremely uncomfortable with the idea that the executive branch could have the power of self funding. This is NOT about money.
This is not about the executive branch proposing spending and authorizing it autocratically. It is about the executive branch doing the thing it was asked by Congress to do!!
Which Congress? How many of the current Congress voted for current spending on SS or an Army base in Germany, the Iraq war or the post office?
A previous Congress authorized spending limited by some debt value. The current Congress can now change either or both of those values.
Sure can! … and it looks like the president may just be able to make an end run around them too. I think he should use the opportunity to do two things in a piece of legislation he introduces (with much fan fair at a press conference):
1) close the trillion dollar coin loophole
2) force the current congress to give up its power to re-neg on what (a potentially previous) congress agreed to pay.
Congress will lose anyway, so they might as well go for the “close the loophole” option.
He can hold it over their heads and say “Do the right thing and pass this legislation… or I’ll be forced to mint a trillion dollar coin!”
Roberts pens a solid aritcle here. He is right that the applicable portion of the Constitution is Article I, Section 8. If Congress is empowered “To borrow money on the credit of the United States,” then it stands to reason that they are also empowered to set a limit on how much we borrow.
The 14th Amendment doesn’t even apply. Here’s the full pertinent text.
“4. The validity of the public debt of the United States, authorized by law, including debts
incurred for payment of pensions and bounties for services in suppressing insurrection or
rebellion, shall not be questioned. But neither the United States nor any State shall
assume or pay any debt or obligation incurred in aid of insurrection or rebellion against
the United States, or any claim for the loss or emancipation of any slave; but all such
debts, obligations and claims shall be held illegal and void.”
This doesn’t say anything about whether the US government is allowed to default on its debt, nor does it question the constitutionality of a debt ceiling. Rather, it does two things. First, it prevents anybody, such as former Confederate states, from questioning the legitimacy of federal debt. It prevents them from refusing to recognize the debt. Second, it prevents anybody who seeks reimbursement from the federal or state governments for losses from war against the US and/or slave emancipation from recovering those losses by voiding those claims.
Perhaps somebody can explain how the 14th Amendment applies to the debt ceiling debate. Based on the history and the words, I’m not seeing it in Section 4 and I don’t think Sections 1-3 apply (Section 5 empowers Congress to enforce Sections 1-4).
US is playing with fire. Their “exorbitant privilege” was rightly conquered when the country was the largest creditor in the world and 80% of the world oil was going to the US and over 43% of the world output was produced in the US. Now the numbers tell a totally different story, a large part of the US industrial complex has been dismantled and offsourced and cannot be rebuilt in less than a generation, but all the debate here and in most of the other media is about “the country cannot run off of dollars” that is totally asinine because everyone knows it, in the US and the other countries… The theme should be how much will you buy in the future with one dollar considering that the median income is decreasing and the technical capabilities of the rest of the world in producing any kind of good and service are increasing soooo fast.
It’s always interesting to see how the “other side” thinks. I wonder how Lance’s beliefs influence his management of other peoples assets?
It continues to amaze me how the “debt” is important/not important depending on which political party is in power.
I would also say he is factually incorrect when he says the Administration is trying to circumvent law.
“I would also say he is factually incorrect when he says the Administration is trying to circumvent law.”
He’s definitely factually incorrect when he says the current administration has not proposed a budget in the last four years.
Here’s the Administration’s current budget
http://www.whitehouse.gov/omb/budget/Overview
Here are past budgets
http://www.gpo.gov/fdsys/browse/collectionGPO.action?collectionCode=BUDGET
I agree with the article, as it has been my position all along. Anything that causes government to pause and people to weigh in, is positive for our system. Then again, I wholeheartedly disagree with our current monetary system, as I believe it is short sided and lacks any knowledge of how humans actually function as a whole. I believe while MR just describes the accounting functionalities of our system, it fails miserably to understand the human component. It is this very human component that explains why our system is failing and will fail in its current state. The system itself has done nothing but fail since its inception. It seemed like a great system for many, the same way a pocket full of credit cards seems like a great idea for someone with no cash. It works great, they can get anything they want, eat anywhere they want, until the credit runs out and the payment is due. It does not matter that you can print your own money in the long run, because that has limitations and all things with limitations will eventually hit those limitations, and then reality returns. We have been pulling forward demand for 40 years and the jig is up. The debt ceiling will not be an issue, in the last minute they will kick the can down the road and try to make it all someone else’s problem, because like you say, it means nothing, but that is not the point. The views I read on this site are very disturbing and I assume that in time many will look back and wonder why they were so far off base with the reality that they see all around them. We are boiling the frog of our own liberty slowly in this country and I can see that no one is yet feeling the heat. As is alwyas the case
“The system itself has done nothing but fail since its inception.”
Is this opinion based on anything like, you know, facts, history?
Really, have you ever read history!
History is written by the victors.
Winston Churchill
Point taken….. but people need to understand that the boiling frog story is in-fact a myth and it’s use as an effective metaphor is somewhat reduced for this reason.
What I mean is that is was destined to fail from it’s inception due to mathematics. If you build something you know is impossible to be sustainable is it not a failure from inception?
Perhaps you could argue ignorance of the designer over willful fraud, but that is a lawyers job.
And why do you believe that the system “was destined to fail from it’s inception due to mathematics”? Can you show how this assertion is true?
That’s an interesting question, one that the advocates of a “debt jubilee” (e.g. Steve Keen) might be willing to take you up on. Cullen doesn’t agree with the debt Jubilee, but there are a lot of overlaps between Keen’s and Cullen’s views. I think the debt jubilee types would say that any system involving geometric growths is in danger and subject to fail at some point, and we do have a system like that. I personally don’t understand the nitty gritty details of their argument, but basically it comes down to something along these lines: a system which relies on ever expanding credit (expanding at a certain rate, i.e. geometric growth) … even with fixed interest rates … will eventually result in a bunch of very indebted debtors, and a few hyper-wealthy creditors, and an economy at a standstill… and one way to fix that is a “debt jubilee.”
I think Minsky too proposed a natural progression from a healthy economy, where borrowing is at reasonable rates and both interest and principal are generally paid back, to speculative borrowing (where the debtors can only afford the interest payments… but they take the gamble anyway because “hey, the economy has been healthy!”), to “ponzi” borrowing where debtors can’t even afford the interest payments (remember negative equity mortgages?). In the old days, this resulted in debtors selling their families and finally themselves into slavery when the payments came due and the “assets” purchased w/ the loans no longer allowed their owners to grow their way out of it (farm implements, perhaps in the old days?)… or alternatively it resulted in debtors fleeing into the wilderness, etc., which caused chaos and made for a poor army. So the king would call for a debt jubilee to correct the situation.
That’s the story as I understand it, but I’d like to see a SIMPLIFIED version of the formulas and a thorough explanation of them so I could really understand the proposed mechanics. On the other hand, I think that Keen has also demonstrated (with his computer models) that an economy like ours CAN remain more or less stable if certain conditions are met (i.e. .. the need for debt jubilees can be avoided).
However, Keen is NOT an advocate of austerity to fix the problem. He thinks that will result in a worse economy, high unemployment, and eventually political extremism (e.g. the “Golden Dawn” fascist party which recently did shockingly well in Greece).
Why doesn’t the president just ask the Fed to create a trillion dollars out of reserves to get us through the next six months.
After all, one of the main points of MR is that the U.S. is sovereign in its currency, so why not just turn on the printing pres.
It can’t legally do this.
Then we’re really not sovereign, are we?
We have operational realities to deal with — one of them you just clarified and the other is that we have this debt ceiling.
I think you and john should read Cullen’s most recent post about social constructs self imposed constraints.
I don’t get your point. “We” are sovereign, and “we” could raise the debt ceiling all “we” want… if “we” could all just get along and work as a team. But the way “we” make decisions is to fight it out through a system of checks and balances… so in the end, “we” may decide to default… or “we” may decide to raise the ceiling… or “we” may decide to mint this stupid coin.
I’m just pointing out that while many posters in here believe that we can never run out of money; clearly, we can.
We can’t legally print; we can’t legally break the debt limit.
And even unlimited borrowing has an inflation constraint.
So a lot of what is propounded as fact by posters is merely theory.
That’s wrong. We can’t legally break the debt ceiling. So your point is moot. I always point out that inflation is the true constraint. Even in a hyperinflation we don’t “run out of money”. That notion is absurd and useless. The govt can run out of its ability to move resources from private to public domain, but that’s not “running out of money”.
I don’t think that’s how it works. I don’t know myself, but I think the problems with that idea are:
1) The president can ask… but the Fed is independent and doesn’t take orders from the President.
2) The reserves that the Fed creates can really only be used to:
a) open market operations
b) loaning to banks on an overnight basis
c) probably others… but basically along the same lines
In other words, those reserves can be used (by the Fed) for transactions with private banks’ through their reserve accounts, nothing else. Am I correct on this people? Let me know please!
That does not directly (or indirectly) put ANY money into the coffers of the US Treasury, and does nothing to avert a default.
Even, if somehow the Fed were to just pump reserves into the Banks’ reserve accounts for free (not in exchange for bonds), this still does NOTHING for the treasury… because congress has not authorized congress to sell more treasuries! That’s the crux of the problem… the government get’s money to pay it’s bills by selling treasuries (and by collecting taxes). If the taxes aren’t cutting it, and the bills are due… it HAS to sell treasuries, regardless of what the Fed does to make good on it’s obligations. If congress explicitly forbids the sale of these treasuries, then we default (since repayment of existing loans [treasuries] is one of the key obligations).
OK, pile on… where did I go wrong here?
Sorry in advance if this appears twice.. I’m not sure what happened to my first response, but it seems to have disappeared. I’ll keep this brief:
I’m not expert, but the way I understand it is that it doesn’t matter what the Fed does with creating reserves… The Fed can ONLY use those reserves in transactions with banks through the banks’ reserve accounts. That’s it! Even if the Fed were to (probably illegally) just GIVE the reserves to the banks, that won’t help the Treasury if congress says it can’t sell any bonds…. and that’s the problem. Taxes are not sufficient (or spending is too high) for the government (through the Treasury) to meet it’s current obligations w/o selling bonds. Plus, the Fed is independent, so Obama can not ORDER them to do anything.
One thing that’s a little hyperbolic about the chart in the article: The y-axis is a linear scale, which makes it look scarier. Anything that grows a certain % each year (e.g. “the Fed targets a 2% inflation rate”) will look EXACTLY like that. It’s the nature of geometric growth, even if it’s just 2%. The y-axis should be a log scale.