Date: 01/19/2022
Author: Mr. X
I had a theory about politics I developed a long time ago. I may make some enemies with this one, but if you don’t have some people mad at you, you’re not saying anything interesting.
When it comes to the specifics of any policy that is being debated, the Democrats tend to be on the right side of the argument. The hard numbers, the actual consequences, the details of what we’re talking about – go with the mainstream media and the White House instead of Fox News. Yet when it comes to the big picture and what may be more fundamentally important in the long run, the conservatives tend to be the only ones paying attention.
On no other issue is this more than true than when it comes to raising the federal debt ceiling. The debt ceiling is technically controlled by Congress and reflects the amount of money that the Treasury can borrow to remain solvent. If the debt ceiling is not raised, the United States takes a massive hit to its fiscal stability and the consequences to the economy could be ruinous. Treasury Secretary Janet Yellen says that we may pass that ceiling… today. She said her Department will take “extraordinary measures” to prevent a financial catastrophe.
Needless to say, it’s a very dangerous situation if the United States of America actually defaults on its bills. In 2011, there was a showdown over the debt ceiling after the fiscally conservative “Tea Party” movement won a strong position in Congress. As a result, America had its credit rating downgraded. If that happens, stocks are going down. This would be one of those rare, singular factors that would swamp the entire market, creating incredible financial instability at a time when the economy – and stockholders especially – really can’t afford it.
President Joe Biden has called Republicans “fiscally demented” over their willingness to go to the mats on this issue. “As President Biden has made clear, Congress must deal with the debt limit and must do so without conditions,” said White House Press Secretary Karine Jean-Pierre. “But Republicans are threatening to hold the nation’s full faith and credit, a mandate of the Constitution, hostage to their demands to cut Social Security, to cut Medicare and to cut Medicaid – brinksmanship that threatens the global economy.” President Biden has asked Speaker McCarthy to fully explain the concessions that he provided in order to ensure the gavel. Not surprisingly, McCarthy has not done so.
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President Biden is obviously correct that there’s an element of nihilism to the current Republican strategy. Defaulting on the debt simply is not an option. There will be intense pressure to raise the limit eventually and the GOP hardliners will not be able to force their way any more than they were able to deny McCarthy becoming speaker.
Yet the conservatives are right in broader scope of history. The debt limit is currently $31.4 trillion. The federal debt as a measure of GDP is now at 120%. The last time it was around that level was in the immediate aftermath of World War II – when the United States was practically unchallenged as the industrial superpower of the world. According to the nonpartisan Congressional Budget Office, federal debt as a share of GDP may reach 185% by 2052. This is completely unsustainable.
Think about what the Press Secretary actually said. The Constitution requires Congress to simply raise the debt, forever, unconditionally?
That’s pure insanity. Yet there’s no alternative.
It’s especially destructive because of Federal Reserve’s policy of increasing interest rates. It will be more expensive for the federal government to borrow every time that the Fed imposes another hike, and we are likely to see at least two more. If the Fed fails to get inflation to its target level of 2% even with interest rate hikes, the situation will reach ruinous proportions at a staggering rate. According to the CBO, payments on interest – alone – will reach $1.2 trillion by 2032, the highest percentage of GDP ever recorded. Making matters worse, the CBO keeps raising its estimates as interest rates and inflation remain high.
How bad is that? Consider the extent of American military spending. A cynic, like me, would say that ultimately, the value of the dollar and the willingness of the world to use it as the reserve currency is dependent on American military power. In 2021, the United States spent almost $2.1 trillion. That’s more than the next nine countries combined. The current proxy war Washington is fighting against Moscow via Ukraine and the efforts to contain China in the Pacific may seem like major commitments, but America’s financial and military power are such that the United States retains a decisive advantage.
However, by 2032, the United States would actually be paying more on interest payments than on national defense. That also leaves aside questions of infrastructure, research and development, education, and other social programs. The Social Security Administration projects that taxes will only be able to cover about 75% of scheduled Social Security benefits by 2035. This doesn’t mean that Social Security will go to zero or be utterly insolvent, as some might suggest. But it does mean that the tipping point will have been reached, and things will only get worse.
Consider the politics of this as well. Again, the debt limit will be raised. The Democrats, in the short-term, are right that it must be raised. Yet this decision will be more and more difficult every single year. The Republicans are right that at some point, we do have to deal with this. But we never, ever will. The system prohibits it. The voters will punish it. Heck, you and I reading this don’t really want it to happen. Do you really want the USA to default this week? Or would we rather we just kick the can down the road and vaguely hope that if we don’t think about the problem, it will go away? I can assure you that Congressmen who don’t think beyond the next term aren’t worrying about it. “In the long run, we’re all dead,” said Lord Keynes, summing about the democratic (small-d) approach to monetary policy.
Interest payments will be increasing at a time when it is likely that demands for more social spending are also likely to increase. If the United States is to maintain its financial hegemony, it needs to maintain its military hegemony – which may be the real reason why Washington is willing to go so far to break Russia’s military power, even fracturing the Russian federation itself. Ultimately, the only way to begin to cover the bills will be to increase taxes, which may slow economic growth, which will increase political tension, which in turn will make all of these other economic problems worse.
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We’re thus caught in the classic problem of democracy. There is never a political incentive to cut domestic spending. Social Security is referred to as the “third rail” of American politics because those who discuss cutting benefits or privatizing the program are generally shocked. George W. Bush’s crushing re-election victory in 2004 was rendered moot after his disastrous effort to privatize Social Security, which led to a midterm “shellacking” (his term) that may have had more to do with fiscal policy than the Iraq War. Even President Donald Trump, who is seen as a radical by many commentators, had an inside track on the Republican nomination in 2015-2016 because he consistently pushed against the idea of cutting social programs.
If we can’t even reform Social Security, how can we cut spending generally? How can we refuse to raise the debt ceiling? Any politician who advocates cuts in defense, education, social spending, healthcare, or just about anything else is likely politically dead. And if the past is any indication, voters are likely to blame those who want to cut spending for any political impasse over the debt limit, especially if it leads to a catastrophic default because neither side will back down in a game of political chicken.
I’d love to say there is a political solution, but there probably isn’t. Barring a complete financial reorganization, there’s no way out of this long-term existential problem. It may even be the key to why empires rise and decline – there’s a historical pattern of cycles that statesmen are trapped within. “Optimism is cowardice,” as Oswald Spengler said.
The good news is that the rest of the world, even adversaries like China, have little to gain from an American economic collapse and don’t want to truly destabilize the world political system. Russia has received little economic support from other nations, and Western and Asian allies of the United States seem to be taking up the slack when it comes to military spending. These leaders may have laughed when President Donald Trump told them to pay their fair share for collective security, but following the invasion of Ukraine, they are doing it. The United States can be propped up for a very long time. Considering China and Russia’s systemic economic problems, there’s also no obvious successor for who can replace the United States.
Thus, the can will get kicked down the road. The debt limit crisis will likely be a similar to the battle over the Speakership, with a lot of militant rhetoric but ultimately the status quo being restored. The system can’t go on forever, but there’s nothing in the short-term that will stop it. The bad news is that the United States is doomed to long-term financial strangulation and there’s probably no way out. The good news – if we can call it that – is that the rest of the world is pretty even worse off.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com to bring you news on what those with power are debating, planning, and doing.
