Fed Unable to Protect from Debt Limit Default | Op Ed.
In December, Congress increased the debt ceiling by $2.5T to $31.4T. The number quickly approached in January, and the debt ceiling debate was intense. Both sides did the usual dance. The debt ceiling debate became a political stalemate, and Congress suspended the limit. The suspension is almost over. Secretary Yellen wrote a letter to Speaker McCarthy this week warning about the need for a debt limit increase or another suspension. The Treasury could default on government obligations as early as June 1.
At the FOMC press conference, Federal Reserve Chairman Jerome Powell told reporters the Fed could not shield the U.S. economy from a debt limit default. "We shouldn't even be talking about a world in which the U.S. doesn't pay its bills. It just shouldn't be a thing. No one should assume that the Fed can really protect the economy and financial system and our reputation globally from the damage that such an event might inflict, [sic]" Powell said about a possible default.
Republicans want spending cuts, and Democrats want a clean bill to increase the debt limit. Powell tried to distance himself from a political posture. He reminded the reporters the debt ceiling is a fiscal issue, not a monetary one. (The legislature sets fiscal policies, and central banks set monetary policies.) "We don't give advice to either side. We would just point out that it's very important that this be done," Powell added.
What is the Debt Ceiling?
Congress created the debt ceiling in 1917 to limit the debt the U.S. government could incur. The U.S. government operates at a deficit, meaning it spends more than it collects in taxes. The national debt is the accumulation of the annual deficits. On average, the U.S. government deficit has been around $1 trillion every year since 2001.
What does it mean to increase the Debt Ceiling?
The government has two options: increasing or suspending the debt ceiling. A suspension permits the government to exceed the debt limit temporarily rather than set a new number. While rare during the first 90 years of the debt ceiling, a suspension has happened seven times since 2013.
What does it mean?
The debt ceiling charade is the most extensive political hustle ever. It is a charade because the words debt ceiling or debt limit don't stop or slow government spending, implying they have no meaning. Congress raised the debt ceiling 100% of the time it approached. The actual times Congress raised the debt ceiling is unknown, but it increased at least 78 times since 1960. The Treasury hasn't updated its story since at least 2011. Read the following excerpts from the Treasury's website about the history of the debt ceiling. Notice anything fishy?
Here is the Treasury website quote for 2023:
"Congress has always acted when called upon to raise the debt limit. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents. Congressional leaders in both parties have recognized that this is necessary."
Here is a quote from a Treasury paper in 2011:
"Congress has always acted when called upon to raise the debt limit. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit-49 times under Republican presidents and 29 times under Democratic presidents. In the coming week, Congress must act to increase the debt limit. Congressional leaders in both parties have recognized that this is necessary."
Clearly, there is a problem here. It is mathematically impossible that both statements are factual. Congress raised the ceiling in December and at least seven other times since 2013. Amazingly, the blurb above has been on several papers since 2011. (The Treasury only has documents from 2011 forward on its website).
This blurb has been the official narrative since 2011. The only difference between the 2011 and 2023 statements is that one sentence was removed. It's absurd. Either the Treasury is making the same copy-and-paste mistake, or they think no one will read the previous statements. I did read several of the earlier statements. Read them for yourself here.
The following is not a partisan statement, but it is a reality. For conversation's sake, let's pretend Congress has the intention of responsible balanced-budget spending in the future. There is still the $93 trillion elephant in the room. The $93T is unfunded liabilities, money the government promised to spend but has yet to transact. Unless Congress cuts spending, Congress will add $93T to the debt eventually. Let that sink in for a second. The debt ceiling must become more than four times its current level to pay our current obligations, and that is if all deficit spending stopped today.
Unless Congress does something about the unfunded liabilities, the debt ceiling hoax will reappear every few years. Every time it goes down the same way. Reds and Blues posture for campaign commercials and create a drama perfectly made for T.V. and selling commercials. It has all the makings of a great story plot: objective and a time crucible. It's like West Side Story but without the singing and dancing. A few politicians will cut a last-minute, closed-door deal, and both sides will blame each other for the drama. However, like a T.V. plot, it is designed to evoke emotions but has no bearing on reality. No matter what they say, Congress intends to spend more on the deficit. We can stop pretending now.
Let's examine the two possible outcomes:
1. Congress Extends the Debt Ceiling
Congress will continue to spend money it doesn't have but plans to take from the labor force through taxes. More Dollars will be printed by the Federal Reserve and backed by U.S. Treasuries and mortgage-backed securities. However, high-interest rates will make government borrowing significantly more expensive. The Fed will want greater guarantees to offset future default risks meaning tax policies will become increasingly draconian. The bottom line will be high inflation, more taxes, and more nations moving away from the Dollar as the primary reserve currency.
2. Congress Defaults
The Dollar is backed by the "full faith and credit" of the United States government. Please notice that there is nothing tangible in that statement like the Dollar is backed by gold, silver, oil, or Pez dispensers. The Dollar's value is an abstract agreement of trust between peoples of the world and the United States government. If that trust is broken through default, the Dollar wouldn't even make good toilet paper during any subsequent shortage.
Nations of the world would panic and behave like a bank run. Everyone would push to the front of the line demanding payment for their debts. Central banks would rapidly sell their U.S. Treasuries and exchange their Dollar reserves for gold, Euros, and Chinese Yuan to prevent future default risks.
The two choices are like being forced to choose between the slow knife of ever-increasing inflation and taxes or a few shotgun blasts of hyperinflation rock salt. Most sensible people would prefer neither, but our elected officials are knowingly or unknowingly trying to see if they can give us both. What interests are they protecting by creating so much debt and frivolous spending? Is it for "We the People" or "They the Power Brokers?"
The made-for-T.V. debt ceiling drama should remind you that politicians think your finances are a commodity they have the right to take. The national debt is so large that it doesn't fit on a standard calculator. Most people are paid for their time, so to put this debate into perspective, it makes sense to think about time. Suppose the only money the government ever spends is the debt we have already accumulated and the $93T in unfunded liabilities. The government must seize every U.S. business's revenues for 4.8 years to pay off current liabilities! Congress thinks everyone in the country will happily work for five years for free. Do you agree with them?
The debt ceiling debate is a discussion about the Dollar's long-term value and how much of your labor the government should be able to control. Right now, it owns almost five years (and growing) of struggle to be paid by our kids and grandkids, and it wants more. It is the next logical step after creating massive debt for a government to remain in power. As Julius Caesar said, the way to control people is with bread and circuses. The bread is government assistance, and the circus is the debt debate.
How do you think this will end? Are the nations of the world entertained? Do they feel they are getting a fair portion at the Dollar bread table? The U.S. Dollar is rapidly losing international prestige, and Congress is arguing about how much more debt and deficit we should accumulate. Do you know that scene in every horror film where every person watching says, "Don't go in there?" The music is getting dramatic, and you know something horrific is about to happen. Well, the music is getting eerily ominous in our economic horror flick. Are you sure you want to go in there?
Do you want to be positioned long-term with Dollar-denominated assets like cash, stocks, and bonds? There are unimaginable risks for the Dollar over the next decade or so. Handing down precious metals and other tangible assets may be the best way to protect our progeny from the dangers of the national debt. If you agree, you may want to act sooner rather than later. The ominous music is getting loud.
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The views expressed are the author's opinions and do not necessarily reflect the opinion of the U.S. Gold Bureau. The article is not investment advice, tax advice, or a guarantee of outcome. There are many factors to consider when making investment decisions. Before investing, it is prudent to seek professional financial advice from trustworthy sources and determine the best strategy that aligns with your objectives, philosophies, and resources.