The Treasury Secretary and other government officials began a full court press in January in order to get the Congress to raise the debt limit on the US national debt. As you know, without counting social security IOU’s, the debt stands now at $14.3 Billion. The interesting argument Obama operatives are using is that increasing the debt limit will somehow show that we are serious about paying our debts. With their adult and serious faces on Obama’s entourage says that passing a “clean” debt increase will assure our creditors that they will be paid. Apparently our creditors will be satisfied even though they are being paid mostly with money manufactured out of thin air by the Fed through its QE2 program. What does this mean for finding real lenders after QE2 is over? Here is what White House Chief economic advisor, Austan Goolsbee, said on ABC in January:
The pressure has continued to mount on the so-called Tea Party Freshmen in the House to raise the debt ceiling without any quid pro quo process to constrain out of control spending. Supposedly, according to the pundits and Obama accolytes, issues of spending are better left to the political process of passing a budget. Of course this wasn’t so easy for FY 2011’s budget which the Democrats, even with overwhelming majorities in both houses in 2010, failed to do.
Does this strike anyone else as ironic or even extremely ironic? Is it not at least a bit incongruous that the administration which ramped up spending to astronomical levels and which lost a mid-term election at least in part because of fiscal issues, is now pointing at the Tea Party Freshmen as lacking concern for the country, now defined as a seriousness about honoring our debt obligations. That the administration has gone out in full campaign mode to advocate a policy of nearly unlimited borrowing in order to “calm” the markets about our debtworthiness also seems a little ironic to me. Remember the old but tried wisdom of George Washington when addressing the issue of debt repayment: “To contract new debts is not the way to pay old ones.” – Letter to James Welch, April 7, 1799. I suppose times and financial fashions have changed in two centuries.
Exactly who is more interested in paying this money back with something of value? Is it the Tea Party Freshmen who came to office on the idea that they would rein in out of control federal government spending? Or is it the administration which is poised to borrow yet another $1.7 or so over the next 12 months? Who will bondholders believe has their best interests in mind even if there is an interruption in the operation of the printing press? Is it administration which is looking to “borrow” the principal and interest from the Fed to pay the maturing debt along with much more to “invest” in domestic priorities or is it those people looking to try to keep the government’s spending within it’s means? Think of yourself as a bank, to which of these two would you rather loan money?
The Administration has tried to frame this debate in political rather than in economic terms. They know that if they can successfully make the Republicans look like politicians seeking a political victory, particularly at the country’s expense, rather than as deficit hawks looking after the public treasury, that they may be able to avoid having to make substantial cuts to the FY 2012 budget. This will provide them a political victory because it will demoralize Tea Party types since their substantial victories in the fall will have counted for little. The Democrats hope the Partiers will either stay home or vote third parties in 2012.
Furthermore, the Democrats are setting up a scenario that even if the Republicans take this issue to the limit and are actually successful in making big inroads in spending but the economy heads into a double dip either because of this or for any other reason before the election, it is the Democrats who will win politically in 2012 and the president will very likely be re-elected with a mandate to spend even more borrowed money to avoid further economic catastrophes. It is quite the political gambit and it looks to me like it may work. Strangely the adminstration in power will be in a position where they can argue that the deficit hawks caused the problem and the problem wouldn’t have happened if the government had “stayed the course” of continued high deficit spending. As a member of the chorus, Treasury Secretary Geithner said in a recent warning to the Republicans concerning using the debt limit vote to force constraint on spending:
(Lawmakers) will say there’s leverage in it, we can advance it. But that would be deeply irresponsible and they will own the risk.
It won’t happen in the end, but if they take it too close to the edge, they will own responsibility for that miscalculation.
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Clearly Geithner is saying that Republican lawmakers are intentionally running the risk of economic catastrophe to even take the issue to the brink in order to force spending cuts because they supposedly “. . . understand that you can’t take any risk the world starts to think the United States won’t meet its obligations.”
“There’s no conceivable way that this city, this government can court that basic risk,” Geithner said.
Obama’s argument is: don’t worry about the soaring debt, what you really need to worry about is the possibility that somebody will put a stop to large scale deficit spending upon which our “prosperity” strangely depends. Here is the vice president making the case explicitly:
This is a “Catch 22.” If we keep borrowing to pay for failed ‘stimulus’ we go bankrupt. And according to Biden, if we don’t keep borrowing and spending like crazy, we go bankrupt. The irony is that we go bankrupt either way. For my part I’d rather go bankrupt from being pennywise than pound foolish. I’d rather do with less now and set the stage for future prosperity than leave a growth-defeating debt for future generations to cope with. I hope it’s not just me who feels this way.
MAY 15 UPDATE: Secretary Geithner has now been forced to sadly ‘predict’ that the failure to quickly pass an increase in the debt ceiling will have the effect of creating a “double dip” recession. See: http://nationaljournal.com/economy/geithner-predicts-double-dip-if-congress-fails-to-lift-debt-ceiling-20110514 .
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