The Debt Crisis

[Donald Aquilano]

For all you people who think we should just raise the debt ceiling....


Default Now, or Suffer a More Expensive Crisis Later

By Ron Paul Jul 22, 2011 1:00 PM ET


Debate over the debt ceiling has reached a fever pitch in recent weeks, with each side trying to outdo the other in a game of political chicken. If you believe some of the things that are being written, the world will come to an end if the U.S. defaults on even the tiniest portion of its debt.

In strict terms, the default being discussed will occur if the U.S. fails to meet its debt obligations, through failure to pay either interest or principal due a bondholder. Proponents of raising the debt ceiling claim that a default on Aug. 2 is unprecedented and will result in calamity (never mind that this is simply an arbitrary date, easily changed, marking a congressional recess). My expectations of such a scenario are more sanguine.

The U.S. government defaulted at least three times on its obligations during the 20th century.

-- In 1934, the government banned ownership of gold and eliminated the right to exchange gold certificates for gold coins. It then immediately revalued gold from $20.67 per troy ounce to $35, thus devaluing the dollar holdings of all Americans by 40 percent.

-- From 1934 to 1968, the federal government continued to issue and redeem silver certificates, notes that circulated as legal tender that could be redeemed for silver coins or silver bars. In 1968, Congress unilaterally reneged on this obligation, too.

-- From 1934 to 1971, foreign governments were permitted by the U.S. government to exchange their dollars for gold through the gold window. In 1971, President Richard Nixon severed this final link between the dollar and gold by closing the gold window, thus in effect defaulting once again on a debt obligation of the U.S. government.

Unlimited Spending

No longer constrained by any sort of commodity backing, the federal government was now free to engage in almost unlimited fiscal profligacy, the only check on its spending being the market’s appetite for Treasury debt. Despite the defaults in 1934, 1968 and 1971, world markets have been only too willing to purchase Treasury debt and thereby fund the government’s deficit spending. If these major defaults didn’t result in decreased investor appetite for U.S. obligations, I see no reason why defaulting on a small amount of debt this August would cause any major changes.

The national debt now stands at just over $14 trillion, while net total liabilities are estimated at over $200 trillion. The government is insolvent, as there is no way that this massive sum of liabilities can ever be paid off. Successive Congresses and administrations have shown absolutely no restraint when it comes to the budget process, and the idea that either of the two parties is serious about getting our fiscal house in order is laughable.

Boom and Bust

The Austrian School’s theory of the business cycle describes how loose central bank monetary policy causes booms and busts: It drives down interest rates below the market rate, lowering the cost of borrowing; encourages malinvestment; and causes economic miscalculation as resources are diverted from the highest value use as reflected in true consumer preferences. Loose monetary policy caused the dot-com bubble and the housing bubble, and now is causing the government debt bubble.

For far too long, the Federal Reserve’s monetary policy and quantitative easing have kept interest rates artificially low, enabling the government to drastically increase its spending by funding its profligacy through new debt whose service costs were lower than they otherwise would have been.

Neither Republicans nor Democrats sought to end this gravy train, with one party prioritizing war spending and the other prioritizing welfare spending, and with both supporting both types of spending. But now, with the end of the second round of quantitative easing, the federal funds rate at the zero bound, and the debt limit maxed out, Congress finds itself in a real quandary.

Hard Decisions

It isn’t too late to return to fiscal sanity. We could start by canceling out the debt held by the Federal Reserve, which would clear $1.6 trillion under the debt ceiling. Or we could cut trillions of dollars in spending by bringing our troops home from overseas, making gradual reforms to Social Security and Medicare, and bringing the federal government back within the limits envisioned by the Constitution. Yet no one is willing to step up to the plate and make the hard decisions that are necessary. Everyone wants to kick the can down the road and believe that deficit spending can continue unabated.

Unless major changes are made today, the U.S. will default on its debt sooner or later, and it is certainly preferable that it be sooner rather than later.

If the government defaults on its debt now, the consequences undoubtedly will be painful in the short term. The loss of its AAA rating will raise the cost of issuing new debt, but this is not altogether a bad thing. Higher borrowing costs will ensure that the government cannot continue the same old spending policies. Budgets will have to be brought into balance (as the cost of servicing debt will be so expensive as to preclude future debt financing of government operations), so hopefully, in the long term, the government will return to sound financial footing.

Raising the Ceiling

The alternative to defaulting now is to keep increasing the debt ceiling, keep spending like a drunken sailor, and hope that the default comes after we die. A future default won’t take the form of a missed payment, but rather will come through hyperinflation. The already incestuous relationship between the Federal Reserve and the Treasury will grow even closer as the Fed begins to purchase debt directly from the Treasury and monetizes debt on a scale that makes QE2 look like a drop in the bucket. Imagine the societal breakdown of Weimar Germany, but in a country five times as large. That is what we face if we do not come to terms with our debt problem immediately.

Default will be painful, but it is all but inevitable for a country as heavily indebted as the U.S. Just as pumping money into the system to combat a recession only ensures an unsustainable economic boom and a future recession worse than the first, so too does continuously raising the debt ceiling only forestall the day of reckoning and ensure that, when it comes, it will be cataclysmic.

We have a choice: default now and take our medicine, or put it off as long as possible, when the effects will be much worse.

Source: Bloomberg http://www.bloomberg.com/news/2011-0...-ron-paul.html

[lordbyroniv]

bd77. I know. The next 2 years are gonna be AMAZING. The Progressives and the Tea Partiers are in a death match and the soul of America is at stake.

[draggar]

But the issue is that the people in charge and the people who manipulate those who are in charge only care about padding their own bank accounts.

Nothing will change while this mentality is still there.

It's even sinking to the lower levels now. We have, in mass, the "I don't care about anyone else, just myself" attitude. Many people today will sell anyone else's sole for a quick buck. They'll abuse the system to the point of breaking it without caring about who is affected by it.

[DomainsInc]

If republicans were in power you can bet they would not be holding out. They had no problem raising it previously.

[Gerry]

If republicans were in power you can bet they would not be holding out. They had no problem raising it previously.

Seven times from 2001-2008.
Three times from 2006-2008
Twice within 4 months in 2008

[katherine]

The US is quickly sinking into third world status. Sad. At least you will be in good company

[Raider]

Let's put some FACTS on the table;

The President does NOT raise the debt ceiling, CONGRESS does.


To prove the point that I have repeatedly made, that Democrats are mostly responsible for the skyrocketing National Debt.. I went back to the last 4 Sessions of Congress, 2 controlled by Republicans in both houses and 2 Controlled by Democrats in both Houses;

The 108th Congress
January 3, 2003 – January 3, 2005
Republicans controlled BOTH the House and Senate
January 3, 2003, the National Debt was $6.3 Trillion
January 3, 2005, the National Debt was $7.5 Trillion
Total added to the National Debt under Republican control: $1.2 Trillion Dollars


The 109th Congress
January 3, 2005 – January 3, 2007
Republicans controlled BOTH the House and Senate
January 3, 2005, the National Debt was $7.6 Trillion
January 3, 2007, the National Debt was $8.6 Trillion
Total added to the National Debt under Republican control: $1 Trillion Dollars


The 110th Congress
January 3, 2007 – January 3, 2009
Democrats controlled BOTH the House and Senate
January 3, 2007, the National Debt was $8.6 Trillion
January 3, 2009, the National Debt was $10.6 Trillion
Total added to the National Debt under Democratic control: $2 Trillion Dollars


The 111th Congress
January 3, 2009 – January 3, 2011
Democrats controlled BOTH the House and Senate
January 3, 2009, the National Debt was $10.6 Trillion
January 3, 2011, the National Debt was $14.0 Trillion (almost exactly)
Total added to the National Debt under Democratic control: $3.4 Trillion Dollars


Debt added under Republican control: $2.2 Trillion
Debt added under Democratic control: $5.4 Trillion (in just 4 years)


If it weren't for Republicans taking control of the House in 2011, the debt ceiling would of already been raised by now and we wouldn't be talking about reducing spending.

[draggar]

It's hilarious that people tend to put the blame on one side or the other - why not look at the real reason? Clearly it's in the government's best interest to keep the population bickering between R and D to keep our attention away from the real problems.

[Gerry]

Dick Cheney said, "Reagan proved deficits don't matter."

Economic Legacy
Reagan Policies Gave Green Light to Red Ink


excerpts
"The lesson we should have learned [from those years] is that deficits have little or no short-term economic impacts," said William A. Niskanen, a member of Reagan's Council of Economic Advisers."

"Voters and politicians became anesthetized to big deficits," Moore recalled. "Reagan was running these big deficits, and liberals argued it was going to be Armageddon. We were going to ruin the economy. Interest rates were going to go through the roof. And none of these things happened."

[Raider]

It's hilarious that people tend to put the blame on one side or the other - why not look at the real reason? Clearly it's in the government's best interest to keep the population bickering between R and D to keep our attention away from the real problems.

It's not so much about blaming one party over the other, it's more about exposing a FAILED ideology, that's whats under attack here, An ideology of "Tax and Spend", Spread the Wealth, Expansion of Government, Throw money we don't have at every problem that comes along and hope it fixes it.. Liberals CANT fix the economy or reduce the debt because their too f*cking busy trying to change the country to suit their own ideology.. For example nationalizing health care, Theirs NOT enough money to pay for it and yet were going to borrow TRILLIONS more to fund it? It's INSANE.

So the next time you see someone trashing the Democratic party, try thinking more outside the box.

[Raider]

First Obama did a radio address asking for public support, that didn't work... Now he's going to do another address?

It's really not an address at all, it's going to be the usual Obama fear mongering, Schools will shut down, Old folks wont get their Social Security checks, they'll be denied emergency medi-care, The stock market will crash, and who will be responsible for all the chaos? Republicans of course...

Just more propaganda bullsh*t from an incompetent BOOB who drove our economy off the cliff and racked up $4 TRILLION Dollars, and now he's asking the people to support him in spending MORE?

I don't think people are buying into his bullshit anymore, They know were in trouble, they know he's piling onto the problem and they know that borrowing MORE is NOT the solution to the problem.

[DomainsInc]

First Obama did a radio address asking for public support, that didn't work... Now he's going to do another address?

It's really not an address at all, it's going to be the usual Obama fear mongering, Schools will shut down, Old folks wont get their Social Security checks, they'll be denied emergency medi-care, The stock market will crash, and who will be responsible for all the chaos? Republicans of course...

Just more propaganda bullsh*t from an incompetent BOOB who drove our economy off the cliff and racked up $4 TRILLION Dollars, and now he's asking the people to support him in spending MORE?

I don't think people are buying into his bullshit anymore, They know were in trouble, they know he's piling onto the problem and they know that borrowing MORE is NOT the solution to the problem.

so if there is a default, you think nothing will happen? if it happens i predict things to be ten times worse than the great depression. hundreds of thousands will most likely die but i don't see anyone allowing this default to happen. it would impact the world in a very bad way.

[Acro]

Suddenly it seems that the US realizes they can't keep on printing money. Richard Nixon ended the gold standard and that's when the dollar became volatile. Republicans blaming the guy who tries to fix the situation (Obama) is like an arsonist yelling at a fireman.

[H2FC]

First Obama did a radio address asking for public support, that didn't work... Now he's going to do another address?

I think its a great idea. Somebody has to explain to the people to what extremes the repugs will go to keep the wealthiest 2% from having to pay their fair share of taxes. Who's better to do that than Obama himself??

[Gerry]

Mother Eva, Sanctus Domainus, has performed a miracle.

Behold!

The years 2000-2008 are gone! They do not exist! Look at your calendars. Those years are blank. My calendar now goes from 1999 and jumps to 2009.

Its a miracle! those eight years never existed. They are non-years.

[Acro]

[whitebark]

It's funny to see both parties yelling at each other about who is right and who is wrong etc etc when neither side has presented a real solution. Neither side has addressed the entire deficit let alone the debt which climbs ever higher every single second.

There must be deep cuts AND new taxes. New and substantial tax revenue is the only way to address the national debt. America needs to pay off its debts and cutting less than half of the present deficit just doesn't cut it. It's not only the feds that are in financial trouble - the states are also drowning in debt and all seem to be playing the same stupid games.

Sorry America - you lived on your credit cards for far too long. As Ron Paul said - face the piper now or get it worse later.

[Acro]

Tax the wealthy corporations RELATIVELY to their wealth. The oil industry, for example, makes astonishing profits on the backs of everyone else. Why are groceries expensive at the store? Because transportation requires gas, that is controlled by Exxon, BP and the rest of the blood suckers. The Republicans don't want to do this, so why blame Obama for wanting to tap the wealthy? Money cannot be printed forever.

[Gerry]

There must be deep cuts AND new taxes. New and substantial tax revenue is the only way to address the national debt. America needs to pay off its debts and cutting less than half of the present deficit just doesn't cut it. It's not only the feds that are in financial trouble - the states are also drowning in debt and all seem to be playing the same stupid games.

I honestly do not see any other way. Its painful but where is the money going to come from? Cuts don't cut it. Cutting spending does not put money back into the coffers - it is simply redirected. Nothing is going back into the empty bucket.

The real loser here is the education system. The financial system is one system in a mess. But the educational system is literally on the brink of total collapse. There is no money for educators. There is no money for schools. You are already seeing schools close by the thousands and teachers laid off in the tens of thousands.

We are about to see the entire nation's educational system become incredibly impersonal. I see massive exodus of traditional schooling going to the internet classes. A physical space can only hold so many kids. A class set up to house 40 students can not suddenly be doubled. It is physically impossible to fit that many bodies into one space. But shifting to internet based instruction, there are no physical limitations.

Is that the answer? Yes and no.

In order to be successful there would need to be reliable internet connectivity nationwide - and that does not exist.
In order to be successful, every home with school aged children should have free internet access - and that is not going to happen.
In order to be successful, every child would have to have a computer for their sole use - and that is not going to happen.

There are some schools that are now so overcrowded due to closings and cutbacks that some students have no place to sit except on the floor in the class.

We, the USA, are going to fall and fail on every level there is.

[Raider]

Tax, Tax, Tax.. The Liberal answer to everything.. Forget about a balanced budget amendment, let's continue to give congress the green light to spend beyond it's means, And when were $17 Trillion in debt instead $14T, and the debt ceiling needs to be raised again, we can create another thread and pound the Tax drums again, and blame those bad bad Republicans for trying to reform it.

Obama racks up $4 Trillion dollars in new debt with NO way to pay for it, expanding the Federal Government, expanding entitlements, expanding the welfare states, all on BORROWED MONEY, and you say the Tax payers should be on the hook for more NEW taxes?. And those who didn't benefit at all from it should pay? That's pretty f*cked up.. But then again, your whole ideology is f*cked up.

Were in one of the worst recessions in history and you dolts think increased taxation is the answer?. Cutting spending and reducing the size of the Federal Government is the answer, $14 Trillion in debt can be eliminated in a very short period of time by adopting many of the policies Ron Paul is suggesting, and it wont require more taxes... Sounds great right? so why not support it?.. You support him but you don't support his economic policies?

The years 2000-2008 are gone! They do not exist! Look at your calendars. Those years are blank. My calendar now goes from 1999 and jumps to 2009.

Its a miracle! those eight years never existed. They are non-years.

Gee, I was almost certain I posted from 2003 to 2011... Have you checked your eyes lately?, Maybe it's not a eye problem at all, it could be that your eyes are just strong enough to see through the walls of your rectum, yeah, that must be it.