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Raising U.S. Debt Ceiling Spells Economic Disaster

Interest-Rates / US Debt Apr 22, 2011 - 08:39 AM GMT

By: LewRockwell

Interest-Rates

Best Financial Markets Analysis ArticleJeff Scribner writes: Nero fiddled while Rome burned. The President and the Congress are playing political games while the national debt grows to out of control proportions. We should hold the government’s feet to the fire and force an end to spending using borrowed money. An opportunity to do this will arise in a month or so.


In April, almost seven months after the start of the fiscal year, Congress finally passed the FY 2011 Federal Budget, nominally $38 Billion (about one percent) less than the proposal by the President. Two things are significant here. The first is that this is the first budget for FY 2011. Congress has spent money from the beginning of FY 2011 (01 October 2010) until mid April by "continuing resolution" in the absence of any budget. The second important point is that the 2011 budget, with the aforementioned $38 Billion reduction, spends more money than was spent in 2010. It is still in deficit. It has been adding to the national debt all year through continuing resolution and will continue to add to the debt for the rest of the year via the budget that was finally passed.

The House of Representatives has also passed a "Budget Blueprint" prepared by Congressman Paul Ryan, Chairman of the House Budget Committee. If all spending and receipts outlined in this document are implemented by the House and Senate and are then signed by the president, spending will be reduced by about six trillion dollars and the deficit will be reduced by about four trillion dollars over ten years. Do you really believe that this will happen? Even if it does, the Federal Government will continue to run deficits and add to the national debt for the next ten years, albeit at a slower rate than the present.

What does this tell you about the difficulty in reining in the runaway spending that has become the habit of Congress? It tells me that something a lot more drastic has to be done to get a grip on Federal spending and to stop adding to the debt immediately.

It so happens that there are just about enough votes in the current House of Representatives to prevent an increase in the debt ceiling. If the debt ceiling is not increased, there will be bigger spending cuts in the 2011 budget and the 2012 budget and every budget after that because we are very close to the debt ceiling. If the debt ceiling is not increased, money cannot be spent that would raise the debt over that ceiling. Deficit spending would end immediately. Congress will be finally forced, at least for a little while, to allocate austerity rather than funding their favorite expenditure with borrowed money.

The voters could then decide whether to re-elect those who voted to increase the debt ceiling or those who tried to be responsible and voted not to. Some people are saying that failure to raise the debt ceiling will cause a catastrophe. If that happens, the voters can consider it. What if there is no catastrophe – just a lot less spending? The voters can consider that, too. Some big spenders are claiming that failure to increase the debt ceiling will cause a recession. We have managed to get into a recession and sustain it while adding to the debt every minute. Deficit spending has not prevented a recession. Moreover, there is reason to believe that not extending the debt limit will actually be good for the economy. Government spending will be curtailed. Some government services will also be curtailed. This provides fertile ground for more free enterprise solutions, more little companies, more employment in the private sector and more GDP growth. Why should we believe those who say increase the debt ceiling or suffer a recession?

Using the FY 2010 numbers above we can see that in order not to create more debt, Congress would have to hold spending, including debt service, to $2,162 Billion. Congress would have to cut $1,294 Billion from FY 2010 spending levels to do that. Where would you cut?

We can fund Social Security and Defense without borrowing. However, the first call on available funds would have to be servicing the current debt. We might have to change Medicare and Medicaid along the lines suggested by Paul Ryan and we would have to be very careful about everything else. Wouldn’t this be a good thing? Just think, after a few years, Congress might actually start to think about surplus budgets to pay down debt and gain spending flexibility from lower debt service costs.

Finally, since Congress will never cut spending enough to balance the budget, it is necessary to force that action via refusal to increase the debt limit. There is no time like the present to do this.

Jeff Scribner [send him mail] is President of ASI Enterprises, Inc., an investment bank serving small and medium sized businesses.

http://www.lewrockwell.com

© 2011 Copyright Collin Moshman / LewRockwell.com - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

peter
22 Apr 11, 15:54
sensible choices

Congress nor the president will do anything other than kick the can as far down the road as possible. Until we are on the precipice of disaster and there is a public outcry, nothing will be done other than to spend and borrow. Sadly, that time is fast approaching. There really isn't anything one can do about it any longer other than to prepare for yourself and your loved ones.


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