The Debt Ceiling Is a Financial Fiction

EXPERT COMMENTARY

The Debt Ceiling Is a Financial Fiction

By Antony Davies |
Jan 04, 2013

The debt ceiling is a financial fiction -- every time we approach the ceiling, Congress raises it. Congress has raised the ceiling almost 80 times since 1962. 

The ceiling only functions as a political tool by forcing the government to loudly and publicly acknowledge each time it borrows more money. In suggesting that we do away with the ceiling entirely, what Treasury Secretary Timothy Geithner really wants is to avoid the repeated public scrutiny that accompanies each round of additional borrowing. 

At present, every American man, woman, and child would have to pony up $52,000 to cover our massive debt. The government won’t send each of us a bill for $52,000, so what does it mean to say that "we each owe $52,000?" Americans will pay this debt in five ways. 

1.  Delayed retirement and lower wages. The primary beneficiary of low interest rates is the US government. The government currently pays an interest rate of about 2.6 percent on its debt. Just five years ago, it was paying 5 percent. If interest rates returned to 5 percent, the government’s annual interest expense would rise to almost $1 trillion a year. Conclusion: The Fed will be forced to hold interest rates at artificially low levels permanently. Low rates mean that seniors can’t afford to retire because their investment savings earn near zero returns. This increases competition for jobs, which lowers wages for younger workers. 

2.  Higher taxes. The more the government pays in interest, the greater is the deficit. The greater the deficit, the more political pressure there is to raise taxes. The debate over the Bush tax cuts, which were set to expire this January, is a good example. 

3.  Inflation. The inflation comes when the debt is so large that the government can no longer tax or borrow enough to pay its bills. When this happens the Federal Reserve will print money to pay for government expenses. They call it “quantitative easing,” but printing money causes inflation, no matter what it is called. Americans will pay for the debt by paying higher prices for everything they buy. 

4.  Broken promises. As it becomes harder for the government to raise money, it will start to renege on Social Security and Medicare promises. There is precedent for this. For example, Social Security retirement benefits used to be tax free. In 1983, Congress changed that by requiring many senior citizens to pay income tax on their benefits. In 2000, Congress raised the retirement age for the first time since Social Security was instituted. Politicians described these changes as “tweaks” to insure Social Security’s continued viability. But for older workers, the government was reneging on its promises. As the debt grows, expect to see a lot of this sort of sleight-of-hand legislation. 

5.  A reduction in public services. The greater the debt is, the higher the government's interest payments. The higher the interest payments, the less the government can spend on public services.

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