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Just Eliminate The Debt Ceiling

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April 11, 2012 – Comments (11)

Amen

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Just Eliminate The Debt Ceiling
April 11, 2012 By Cullen Roche

http://monetaryrealism.com/just-eliminate-the-debt-ceiling/

The US government has no spending constraint.  There is no such thing as the USA not being able to make a debt payment.  But for some reason we have enacted a silly law that binds Congress by the “debt ceiling”.  The debt ceiling is a misguided law for several reasons:

-- The debt ceiling is only reached when past spending results in current debt bumping up against the debt ceiling.  This is like deciding to build a 100 foot high structure directly beneath 50 foot high telephone wires and then complaining that we can’t tear down the telephone wires once we reach the 50 foot level.  It makes no sense.
-- The Public Debt Acts were all put in place under a fixed currency regime in the 30′s and 40′s.  In 1971 our monetary system became a floating exchange rate system with no convertibility.  The laws, however, remain outdated and are now defunct.
-- Congress needs to be constrained in its spending.  But is debt the right target?  No.  The USA, as an autonomous currency issuer can never “run out of money” or fail to make a debt payment.  There is simply no such thing as an autonomous currency issuer being constrained in its ability to spend.  So it makes no sense to create a debt ceiling to impede debt issuance and risk self imposed default due to political ignorance.
-- The true constraint for an autonomous currency issuer is always inflation.  Congress should enact a process by which we measure the effect of spending on overall living standards and adjust policy accordingly.  We should not have a debt ceiling.  If anything, we should have an inflation ceiling.

The best way to get around the perpetual debt ceiling concerns?  Just eliminate it.  The law makes no sense anyhow and does not apply to our monetary system.  There’s absolutely no need for us to keep having recurring “debt ceiling crises” just because policy makers have failed to update the legal system to match our evolving monetary system.

11 Comments – Post Your Own

#1) On April 11, 2012 at 7:20 PM, dbjella (< 20) wrote:

 If we do that, then can we implement a spending limit based on inflation?

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#2) On April 12, 2012 at 9:15 AM, XMFSinchiruna (27.12) wrote:

Binve, while I do find the particular legal structure quite odd, the text posted above makes me very uncomfortable; particularly the portion claiming no constraints on the ability to spend. Unsustainable debt is a breeding ground for runaway inflation, so shifting to an inflation ceiling would accomplish nothing except to shorten the window of opportunity to avert disaster.

A lack of respect for the damage that unsustainable debt has on a country and its currency is part of what got us into this mess. The attitude that debt doesn't really matter must be challenged on every front.

Hope you're well. We haven't corresponded in a while. 

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#3) On April 12, 2012 at 9:50 AM, XMFSinchiruna (27.12) wrote:

I just found your MTAA blog, which I do seem to recall seeing when you first launched, but somehow I stopped keeping up. I'm now following you on Twitter, so hopefully I'll have an easier time of it now.  :)

Congratulations on all that you are building by sharing your unique insights and perspectives!  

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#4) On April 12, 2012 at 10:03 AM, binve (< 20) wrote:

TMFSinchiruna ,

Hey Sinch, good to see you! I am well, thanks. I hope you are too.

the text posted above makes me very uncomfortable; particularly the portion claiming no constraints on the ability to spend.

The point Cullen is trying to make and I fully agree with is that there are no operational constraints on spending. The paradigm of taxes or bonds funding government spending under the Gold Standard do not apply under a floating exchange rate fiat currency standard.

It is important that analysis of our monetary system is compatible with how it actually works, what are the operationaly realities and what are the real constraints (like inflation). And the fact the cost-push inflation is a very different phenomenon than demand-pull inflation. The discussion of those concepts was the major impetus for me writing this post: http://caps.fool.com/Blogs/why-deficit-spending-and/621467, or this version of the same post (with significantly less typos): http://marketthoughtsandanalysis.blogspot.com/2011/08/why-deficit-spending-and-creative.html.

Unsustainable debt is a breeding ground for runaway inflation,

What is unsustainable? Japan has over 200% Debt/GDP and their bond markets haven't collapsed (rates are still near all times lows) and they are not on the brink of massive inflation (they still vascillate between 1-2% inflation or 1-2% deflation).

Calling the issuance of Treasury Securities by the soverign issuer of a floating exchange rate currency  'debt' is a misleading characterization. Is it a liability of the government from a balance sheet standpont? yes. Does it 'borrow' the funds from somewhere the way a private citizen does? No.

The attitude that debt doesn't really matter must be challenged on every front.

Government Debt most *defnitely* matters. I did not, nor did I suggest that it doesn't. The point is to understand what a government deficit spending position means in the current macroecomic context. And what the constraints really are. And as we both agree, the main constraint is inflation.

Demand-pull inflation is caused by too much government spending when the economy is operating near full capacity. If we have an economy running near full capacity, high utilization of resources (including and most especially employment) => low unemployment and a positive current account, then a Government Budget Deficit (G-T > 0) is exactly the *wrong* position for the government to take. Because all resources are already bid for at the prices where they produce useful economic output. Further increase of net financial assets into that environment does not cause any further economic output to take place it just raises the general price level across all components of the CPI index.

So in a case like that, we see that a government deficit spending  positon results only in inflation. And that this position most definitely matters.

However, that is not at all the type of scenario we have now..

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#5) On April 12, 2012 at 10:04 AM, binve (< 20) wrote:

TMFSinchiruna ,

Congratulations on all that you are building by sharing your unique insights and perspectives! 

Thanks, I appreciate that man!.

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#6) On April 12, 2012 at 10:16 AM, whereaminow (< 20) wrote:

If we are going to start eliminating rules that no one ever follows anyway, then I'm going to take the lead by eliminating my Alcohol Consumption Ceiling. Like Congress' debt ceiling, the rule is in place and I often make a big huff about it, but it doesn't restrain me in practice anyway :)

David in Liberty 

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#7) On April 12, 2012 at 10:17 AM, leohaas (31.21) wrote:

The debt ceiling will not be eliminated because it is such a great political football. Politicians love it. That's the only reason we have it right now.

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#8) On April 12, 2012 at 11:00 AM, XMFSinchiruna (27.12) wrote:

I love what you bring to a debate, binve, and if I had to put together a macroeconomic think-tank there would be a chair reserved for you and whereaminow both!

It's not demand-pull inflation that concerns me, but rather the cost-push variety.

Japan may have avoided catastrophe so far, but some might suggest it remains something of a ticking time bomb -- and perhaps a broadly overlooked one at that -- in the context of renewed global systemic distress.

"Calling the issuance of Treasury Securities by the soverign issuer of a floating exchange rate currency 'debt' is a misleading characterization." - Well, I definitely can't agree with you there, but kudos for the mental gymnastics that got you there. :)

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#9) On April 12, 2012 at 11:27 AM, binve (< 20) wrote:

TMFSinchiruna,

I love what you bring to a debate, binve, and if I had to put together a macroeconomic think-tank there would be a chair reserved for you and whereaminow both!

Thanks Sinch! You know that I have also read and respected your analysis for a very long time, even though our thoughts on some of these matters do diverge.

It's not demand-pull inflation that concerns me, but rather the cost-push variety.

I agree that demand-pull inflation is a small threat in the current envrionment. And I too am concerned with cost-push inflation. I dedicated as section to its discussion here: http://marketthoughtsandanalysis.blogspot.com/2011/08/why-deficit-spending-and-creative.html#costpush. Really this boils down to oil and the lack of a coherent energy policy the US has had for decades. I think we the US is serious about dealing with this cost-push inflation driver, then we have to be serious about energy independence. I discuss that in this section: http://marketthoughtsandanalysis.blogspot.com/2011/08/why-deficit-spending-and-creative.html#differentapproach.

Japan may have avoided catastrophe so far, but some might suggest it remains something of a ticking time bomb -- and perhaps a broadly overlooked one at that -- in the context of renewed global systemic distress.

I don't really agree with this characterization, because a time-bomb suggests their situation will explode. Rather there siuation is a prototype for the US in many ways. In the 1990s they had their own real estate boom/bust and financial crisis. The Japanaese private domestic sector has been in a balance sheet recession for decades, paying down the debt that they accumulated during their bubble (the way the US private domestic sector is doing so now). This is factor is still a major reason why the Japanese economy is in a malaise.

Well, I definitely can't agree with you there, but kudos for the mental gymnastics that got you there. :)

Fair enough :) Thanks man!.

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#10) On April 12, 2012 at 1:48 PM, chk999 (99.97) wrote:

Japan is in a demographic trap with a falling population that is aging as well. Eventually they run out of able-bodied citizens. According to this CNN article http://www.cnn.com/2012/01/30/world/asia/japan-population-decline/index.html Japan's population will fall by 30% and the elderly will be 40% of the total by 2060.

I'd call that a time bomb. 

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#11) On April 13, 2012 at 9:20 AM, Melaschasm (53.74) wrote:

As last year showed, the debt ceiling is one of the most effective tools for congress to impliment spending restraint.  Unfortunately only a tiny minority of congresspersons are interested in spending restraint.

If the american people ever get serious about spending restraint, I hope the debt ceiling is still available as a tool for congress to use. 

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