By: Peter Schiff, CEO of Euro Pacific Capital
-- Posted Monday, 3 December 2012 | | Source: GoldSeek.com
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.
