You gotta love a good media buzz. Even people who were up until recently completely disinterested in economics started having strong opinions about the recent debt ceiling ‘crisis’. Shows you the power of the media to turn our heads.
I’ve put the word crisis in quotes, because it never really was one – more like a big charade that repeats every few years. The eleventh-hour compromise might have seemed like quite an event to some, but this adult (or not so adult) sand box play actually comes around quite regularly. The government spends and spends, debt grows, the Treasury predicts the end of the world, both political sides entrench on their demands, and a few days before a projected default there’s a wet handshake and a bill that authorizes more and more spending. Let the cycle start over.
Interestingly, though a default on US sovereign debt was unlikely, it would neither have been the end of the economy, nor the first time for the US to default.
What’s the outcome of this bill, de facto? Well, guess what – in reality, there’s now no such thing as a debt limit until 2025! The Treasury can borrow as much as it wants and use more accounting tricks to keep paying bills.
Imagine if you spent hundreds of thousands of dollars each month over the limit on your credit card, but the card company also had to listen to you when setting a new and higher limit for the next month. Sounds reckless?
The bond market is now being flooded by the Treasury to get the money needed until then, thereby draining bank liquidity even further, whose deposits are financing this debt. The latter has already skyrocketed by more than $350 billion in one day. Brace yourself for more, as this will impact the already scarce money supply heavily. The proceeds are used to refill the Treasury’s purse, and will not end up in the market like they often do after the government massively issues bonds (2020 anyone?). Together with the very tight monetary environment we find ourselves in, this will in all likelihood only exacerbate the already stretched credit conditions, as witnessed by the recent episode of bank insolvencies.
But the more burning issue again is the reckless federal government spending itself. Saved by the bill, and kicking the can of unsustainable debt (which interest payments will soon become the US’ biggest expense) down the road.
Procrastination in dealing with the hangover from this ‘Big Spender’ attitude will be costly though – flamboyant borrowing, credit creation and spending is, as logic dictates, only set to keep inflation high for the foreseeable future.
We seem to be stuck in a moment in time where debt is used like cocaine – if you just keep sniffing bigger and bigger amounts, the high will never stop. Until at some point the heart gives out.
But then nowadays governments, infused by Keynesian rat-poison economic ideas that are not only championing excessive interventionism but also endless profligacy, always have one last excuse left to give – that things just didn’t work out because we didn’t spend enough.
