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Treasury Secretary Timothy Geithner made
news last week by proposing to transfer the Congressional prerogative to
raise the debt ceiling to the President. The change would essentially do away
with the meaningless debt ceiling debates that have become ritual kabuki in
Washington over the past few generations. Most Republicans have dismissed the
proposal as a blatant executive power grab that will significantly weaken
both the Congress and the minority party. While this is certainly true,
Congress will only lose a power that it has never shown the slightest courage
to actually use. But in truth, the proposal has the merit of refreshing
honesty. By telling U.S. taxpayers, and the world in general, that the U.S.
government has no intention of ever balancing its budget or limiting its
accumulation of unsustainable debt, then perhaps we can begin to have an
honest discussion about our economic future.
Congress has always decided how much
money the U.S. government will spend and how it will tax the citizenry to
meet those obligations. Geithner's proposal will change none of that. The
debt ceiling debates have been simply to authorize the U.S. Treasury to issue
debt to cover the ever widening gap between what Congress spends and what it
taxes. As a result, these debates have become nothing more than exercises in
feigned outrage. If Congress wants to control the debt, let them do so. If
they don't care, just continue on the current path. Dropping the pretense is
at least more honest.
The move will also help blunt the
ridiculous assertions made by those in favor of lifting the debt ceiling that
doing so somehow means that the United States is taking the prudent and moral
step of "paying its bills." In a press conference this week, Obama
Administration Press Secretary Jay Carney claimed that by raising the
ceiling, U.S. creditors will know that our government will meet its
obligations. That is taking Orwellian doublethink to new heights of
absurdity.
It is impossible to "pay"
one's bills by borrowing more. Taking out new loans to retire existing debt
may replace old creditors with newer, larger, creditors, but it can never be
described as a real pay down. It's like paying off your Visa card with a
Master Card. Paying one's bills requires that outstanding debt be diminished.
In direct opposition to Carney's and Geithner's statements, the only way to
force the government to actually pay its bills is to not raise the debt
ceiling. But a fictitious debt limit is worse because it allows Congress to
pretend that its atrocious budgeting decisions are not to blame.
Both Congress and the President readily
admit that without an increase in the debt ceiling, the government will
default on its obligations. This is tantamount to an admission that we lack
the capacity or political will to actually repay what we have borrowed. Yet
despite this, our creditors continue to loan us more money. As existing
treasury bonds mature, we not only borrow the money necessary to redeem them,
but we borrow it from the very people cashing them in. So it's not really
like paying our Visa bill with our MasterCard, it's like paying our Visa with
our Visa.
The debt ceiling itself is both an
ill-conceived compromise and a relic of past governmental integrity. For its
first 128 years as a republic, the United States was able to function without
a debt ceiling. This was possible for the simple reason that U.S. government
had no central bank and could not borrow beyond its ability to repay through
taxation. And since the ability to tax is always limited by taxpayers' assets
(and their extreme hostility to those who want to take them), legal gimmicks
were not needed to prevent Congress from spending too freely. But the
creation of the Federal Reserve in 1913 gave the Federal Government a
potential means to borrow indefinitely by having the new bank buy its debt.
Sensing this danger, the original Federal Reserve Act of 1913 prohibited the
Fed from buying or holding government debt.
But just four years later the United
States needed a means to raise money quickly to pay for its efforts in the
First World War. The government passed an amendment to the charter to allow
the Fed to purchase Treasury Bonds. Fearing (correctly) that this would
create a mechanism for perpetual debt expansion, conservative lawmakers
insisted that the amendment include a "debt ceiling" provision that
would cap the amount that the government could borrow.
What these otherwise forward looking
politicians somehow failed to grasp was that such a statutory limit was
wholly meaningless, as it could be perpetually raised by future legislative
action. This is exactly what has happened. The debt ceiling has been raised,
with varying degrees of fanfare, every time it has been hit. This renders the
law completely meaningless.
Now of course, under the pretense of
fiscal responsibility, the President wants to do the most fiscally
irresponsible thing imaginable -- eliminate the ceiling entirely. He hopes
that doing so will send a clear and unequivocal message that America will
never default on its debts. However, the message may not resonate the way the
President hopes. What our creditors may actually hear is that nothing will
stand in the way of America's accumulation of more debt. Such a development
may be the shock therapy our creditors need to finally cut us off for good.
If that occurs, interest rates in the United States could finally rise to
more rational levels. A significant increase in the cost of borrowing will
create the mother of all fiscal cliffs. It's too bad that Tim Geithner can't
see that one coming.
Peter Schiff is the CEO and Chief Global
Strategist of Euro Pacific Capital, best-selling author and host of
syndicated Peter Schiff Show.
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