Snow job about the public debt
March 17th, 2006 | by mbhunter |This AP article reports on the recent Senate vote to raise the federal debt limit to (a mere) $9 trillion.
The article presents very strange statements from Treasury Secretary John Snow:
The Senate vote came a day after Treasury Secretary John Snow warned lawmakers that action was “critical to provide certainty to financial markets that the integrity of the obligations of the United States will not be compromised.”
After the vote, Snow applauded Congress for “protecting the full faith and credit of the United States,” saying it ensures that the government “can deliver on promises already made, such as Social Security and Medicare payments and aid for the victims of the 2005 hurricanes.”
So, assuming that the action that Sec. Snow was referring to was the increase in the federal debt limit, Congress did a Good Thing by allowing the government to borrow more, since it upholds the integrity of the obligations of the United States.
This makes no sense to me. I see another increase in the federal debt limit as further undermining the integrity of the obligations of the US. It sends a signal that the debt limit is even less of a constraint than it was before. It furthers the notion that the US has little intention of ever paying its creditors back. It enables us to live even more hand-to-mouth and straps us more and more. How is this “protecting the full faith and credit of the United States?”
If we make an analogy to consumer debt, increasing a consumer’s credit card debt limit makes him less likely to be able to get financing for a home. Why? Because the mortgage lender sees the possibility of more credit card debt and a corresponding increase in likelihood of default.
Consumers don’t have to get into debt — the government is doing that for us just fine: well over $27,000 for every American, young or old.
How should Congress handle the public debt? Let’s talk about it in the MBH Forum, under Debt Reduction. Reminder: I’m giving away free magazine subscriptions!!
8 Responses to “Snow job about the public debt”
By Finance Junkie on Mar 17, 2006 | Reply
It’s important for the government to continue to fund it’s obligations. It’s equally important for the government to reduce it’s pace of making obligations.
There is a remarkably large portion of our debt held by foreign countries (i.e. China). If China (or others) thinks the U.S. will default on debt payments, it’ll sell off some or all of the U.S. debt holdings.
This would likely put excessive supply of U.S. debt on the market and drive up the interest rates on U.S. debt so that sufficient demand for the debt is created. End result would be higher interest rates on U.S. debt. Higher interest rates compound our already mind-boggling problem.
By MoneyDummy on Mar 17, 2006 | Reply
For starters, we could stop getting involved in every unbelievably expensive, decades-long global conflict that presents itself. *Sigh*
By Debt Hater on Mar 17, 2006 | Reply
I posted about this last night. I don’t understand all of this funding obligations business, but I think it sends an awful message to people. It says you don’t need to be fiscally responsible. The most powerful country in the world isn’t!
By mbhunter on Mar 18, 2006 | Reply
Thanks for your comments everyone!
The longer the insanity goes on, the harder the fall will be when we run out of options. It’s not a matter of if we will wise up — it’s when.
By Suresh on Mar 20, 2006 | Reply
Congress should deal with the public debt by cutting spending (not to be confused with increasing spending at a lower rate than the prior fiscal year) and/or increasing taxation.
What’s so wrong with public borrowing? Higher government spending leads to inflation, if it is financed by increasing the money supply. How does this happen?
1. The U.S. Treasury sells U.S. Treasury securities (e.g., bills, notes, and bonds) to the Federal Reserve. The Federal Reserve pays for the U.S. Treasury securities with newly printed Federal Reserve Notes (what you and I call dollars – although Constitutionally, that’s incorrect), or by electronic credit to the Treasury. The Treasury then pays for the higher spending with this new money. The recipients of the new money deposit it in their commercial banks. The deposits serve as reserves upon which more money can be loaned out by the banks in a ratio determined by the Federal Reserve-prescribed Reserve Ratio. Note that the new money becomes what is called “high powered money” when it is received by banks and a multiple of which can be loaned out subject to the Reserve Ratio. No other transaction generates this multiplier effect on the money supply.
2. To get around bond sale limits to the Federal Reserve, the Treasury sells U.S. Treasury securities to the public and the Federal Reserve buys same from the public with newly printed Federal Reserve Notes.
Now, here’s what galls me: how many Senators and Congressmen will admit to you the American taxpaying saver/investor that they are increasing the money supply and depreciating the U.S. dollar through their legislated expenditures?! Of course, they don’t. Instead, they yammer about greedy companies (especially greedy oil companies), stingy oil producing nations, etc.
The debate of whether we should increase the debt ceiling must include whether you and I are happy to bear the burden of inflation’s effects. I’m not.
By Anonymous on Mar 22, 2006 | Reply
Assuming that they wanted to pay down the debt, I can think of a pretty simple plan. Assign each taxpayer a portion of it. Okay, it isn’t simple anymore. It would be political suicide to spell out any method of apportioning it, but bear with me. Then let each of us pay down our portion.
The minimum payment will be based on an amortization schedule determined by life expectancy and whatever interest rate the Federal government is paying on that debt. Yeah, yeah, just work out the average interest rate across all of it. You can’t directly refinance it, but you have the option of taking out a home equity loan and paying off your share of the debt.
Okay, that’s all a fantasy. There’s ample evidence that the average Congressperson doesn’t have the willpower to stay on a sensible diet and exercise regularly, something that would directly benefit them as individuals, so there’s no reason to believe they can actually stop spending our money. However, you can refinance your share of the national debt and it bears a striking resemblance to the plan I just laid out. Steven Landsburg explained how to do it in this column (http://www.slate.com/id/2028) nearly a decade ago.