Debt Ceiling Kabuki: Republicans Will Cave and U.S. Government Finances Will Get Even Worse: News: The Independent Institute

here we go again. Treasury Secretary Janet Yellen has warned that the federal government’s borrowing limit has been reached. Even if the Treasury takes “extraordinary measures”, the government’s solvency will be exhausted within months.

Leaders of the Republican-controlled House of Representatives said the chamber would not vote to raise the debt ceiling, which would allow further borrowing without spending cuts. But the White House and Democratic leaders rejected the offer.

Bond markets could soon be volatile. Panicists will warn that the US will default on its bond obligations and will no longer be able to pay for Social Security and Medicare.

The White House will bet that the impasse will hurt the opposition, which it will, and then strike a deal that essentially involves a Republican-led House concession while the White House and Democrats agree to pointless budget cuts (in reality, cuts to planned increases, not real cuts ), if they come to fruition, not much changes in the grand scheme of things.

And all because of the infeasibility of America’s balance sheet continuing to sink into a banana republic.

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We’ve been here before. There’s nothing to suggest that the current fight over the debt ceiling between the Republican House of Representatives and the Democratic White House won’t follow a similar playbook.

First, let’s clarify the risk of US debt default. No one was there. The US can and will continue to borrow and inflate to get out of debt stress. Even without raising the debt ceiling (which is only possible in la-la land), the government can always, like you and me, prioritize its spending by paying down debt and keeping promises to retirees and elderly patients. Yes, it will have to withhold some other payments (that’s what prioritization is about, right?), but it won’t default.

Let’s figure out other things too. Borrowing needs did not stem from the COVID-19 pandemic or the war in Ukraine. The deficit has increased by 12% since last year alone, when it fell sharply from the year before, as politicians can no longer make a convincing case that extraordinary COVID-related spending is still needed.

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Some of the increase was related to rising interest rates. But it would be foolish to blame the Fed’s monetary tightening for the debt ceiling crisis. The culprits are fiscal profligate spenders, who have long ramped up America’s deficit spending like crazy, accumulating astronomical amounts of debt.

To be sure, monetary policy has contributed heavily to the financial chaos in the U.S. government by keeping interest rates artificially low for more than a decade, making taking on ever-increasing debt seem like a petty sin that is hardly scrutinized. punish.

As a result of this fiscal profligacy and interest rate repression, public debt has increased from nearly $6 trillion to nearly $31 trillion since the start of the new millennium, growing at nearly six times the rate of interest payment growth.

Sooner or later this fiction will meet reality. Now is the time – the Fed has to raise interest rates to fight inflation.

The U.S. government’s finances are set to get worse in the future, with interest payments expected to triple over the next decade.

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Continuing to raise the debt ceiling without ever doing anything meaningful to the ham-fisted US government is why we find ourselves in the current situation. If we count entitlements, mandatory spending measures, defense budget, and interest payments, Congress has hardly any discretion (defense is politically untouchable, other countries are legally untouchable).

One cannot long-term pursue contradictory goals and expect consistent results. The welfare state, the war state, and the fiscally responsible state are mutually exclusive propositions.

The US government has long decided to pursue the first two and abandon the third. It will soon discover that the other two are also incompatible – precisely because, in the absence of an overriding sense of financial responsibility, there is no way to maintain these two behemoths.

House Republicans could demand deep spending cuts in exchange for raising the debt ceiling, but it is doomed to failure because, in the political game, all is not what it seems. Especially spending “cuts”. It’s still worth a shot – I guess.


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