Holding Ourselves Hostage Again….

Do you remember that scene from Blazing Saddles where Bart holds himself hostage?  In case you don’t (and sorry for the language in advance if you watch the scene), the town is excited to introduce their new sheriff until they find out he’s African American at which point they inform him he won’t be serving as their sheriff and they turn their guns on him.  Bart one ups them and turns his own gun on himself and starts talking to himself like a crazy man as he convinces them all not to shoot him.  The towns people all panic and treat him as though he’s been the victim of a hostage situation even though he’s the one holding himself hostage.

As the debt ceiling debate rolls around again it reminds me of what the US Congress is doing to itself – we’ve already appropriated spending, but we’re going to use the debt ceiling to threaten default on ourselves in order to cut spending.  In other words, we’re now holding ourselves hostage.

Anyhow, as this whole silly debate flares up again let’s just remember a few things that show how terribly irrational this whole debate really is:

  • The US government is a contingent currency issuer.  That means we can always produce the currency necessary to pay off our bills.  In fact, the US Treasury could legally do this immediately via the Platinum Coin loophole (which yes, is silly, but silly situations like holding yourself hostage in the face of a default that would be catastrophic, require extreme measures).
  • The US government cannot “run out of money”.  There is really no such thing as defaulting on our obligations which are denominated entirely in a currency we can create.
  •  The US government is nothing like you or I who cannot tax to procure funding, sell risk free bonds or print off currency if needed.
  • The US government is constrained not by an inability to create money, but by the ability to spend too much or create too much inflation.
  • If inflation is the real constraint then we should all note that output is low, unemployment is high, and inflation is very low by historical levels.  In other words, we could actually use a lot more spending in this environment.
  • The debt ceiling is only reached because the US government has already appropriated spending.  In other words, this “constraint” is the equivalent of eating a cheeseburger and then tying a knot in your small intestine and then threatening your stomach not to digest the food.
  • If we want to have a debate about the efficacy of government spending then let’s have that debate.  But let’s not use the threat of default to do so.  That’s entirely irrational and using the threat of default to promote a policy position is an abuse of power that should never be tolerated.
Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • JWG

    The debt ceiling is just another arbitrary, rules based constraint on federal spending and money creation in a pure fiat system. It is no more or less legitimate than any other legislative or regulatory constraint that could be eliminated tomorrow.

  • nameiusedlasttime…again

    Arent these two points contradictory?

    - The US government cannot “run out of money”. There is really no such thing as defaulting on our obligations which are denominated entirely in a currency we can create.
    - The US government …… cannot …… print off currency if needed.

    Or am I just reading it wrong?

  • http://jerrykhachoyan.com TheArmoTrader

    I’m pretty sure it is a typo/mis-wording.

  • Dennis

    “…eating a cheeseburger and then tying a knot in your small intestine and then threatening your stomach not to digest the food.” well….not quite. The banksters designed a cork for Uncle Sam’s ass with the debt ceiling law. Over the years we have seen how it inevitably blows out; the whole thing stinks.

  • http://cmamonetary.org LXDR1F7

    “There is really no such thing as defaulting on our obligations which are denominated entirely in a currency we can create.”

    But the fed and government are quasi separate. So therefore the gov. could run out of money unless they do they platinum coin thing.

  • But What Do I Know?

    I agree with your points, Cullen–wish the MSM would figure them out as well. I would suggest that there is a restraint on government spending other than inflation, though. Government spending must be agreed on by TPTB–and many of those are more concerned with making sure that money doesn’t leak into the hands of those they consider unworthy.

    People can argue (and have) forever about what constitutes “unworthy”–and some of those considerations are what we might consider reasonable. For instance, there is an unspoken assumption that people should work or do something to get money from the government–it shouldn’t just be handed out for no reason. From an monetary aggregate point of view, it doesn’t really matter what the money is issued for, as long as it is put out there into circulation. But we are conditioned to think that we need to do something to get money–hard work pays off, easy money corrupts, etc.

    The political class needs to think up new ways of distributing money which they can sell as justified and moral–they’re not doing it (yet). This is a constraint on spending that is the main brake right now.

  • JGF

    This sentence:

    “The US government is nothing like you or I and cannot tax to procure funding, sell risk free bonds or print off currency if needed.”

    …has a typo, yes?

    It ought to say something like:

    “The US government is nothing like you or I. Individuals cannot tax to procure funding, sell risk free bonds or print off currency if needed. The US government can.”

  • Joseph Browning

    Lets all have a moment of silence in remembrance of the Gephardt Rule.

  • http://orcamgroup.com Cullen Roche

    Should read:

    “The US government is nothing like you or I who cannot tax to procure funding, sell risk free bonds or print off currency if needed.”

    Sorry.

  • Johnny Evers

    Lot of points to disagree with.
    First, we really haven’t appropriated the money. The entitlement spending just goes up and up and now we’ve added ObamaCare which really has an unlimited price tag.
    Second, the Congress does have the power of the purse — you’re going to have to come up with a better argument than, ‘We can spend whatever we want.’
    Even those of us who accept that the federal government can’t run out of money, and accept the inflation constraint, believe that deficit spending today that doesn’t increase growth tomorrow will have to be ‘paid for’ later — maybe with inflation, maybe with Japanese-style deflation. Who knows really what the outcome will be, but when you make foolish spending choices there are often unforseen consequences.
    Sure, it’s a hostage-type situaiton. That’s just politics.

  • Mr. Market

    The governmrnt already appropriated the money ?? That makes the “Debt Ceiling” debate even more “Kabuki”.

  • Anonymous

    Fed tapers on the 18th, German elections fail on the 22nd, Debt ceiling is raised, but only after cuts to Obamacare and a war to destroy the pipeline, Euro goes into chaos, Dollar rallies…….. economy softens further, equities rally, 10 years hits 3.5%……….. Fed stops tapering….. dollar crashes, world loses confidence, debt implodes, equities get crushed.

    https://www.youtube.com/watch?v=E2VCwBzGdPM

  • Mr. Market

    Since when are T-bonds risk free ? Pragcap says that government debt “never needs to be paid back”. I would quote Michael Hudson: “Debts that can’t be paid back, will not be paid back”.