The Debt Ceiling: Long and Short Term Consequences

During the next 2 weeks, Congress will be asked once again to raise the limit on the federal debt ceiling. We don’t need to wonder if the debt ceiling will be raised. Every time in history that Congress has been asked to raise the debt ceiling, it has voted to do so. It seems unlikely that this year will be any different. You’ll hear a lot of rhetoric during the next 2 weeks over this issue. There’ll be finger-pointing, accusation, and name-calling, but at the end of the day, the debt ceiling will be raised.

I want to discuss the consequences of this decision; both in terms of what will happen when the debt ceiling is raised and what would happen if it were not. The consequences are best expressed in the words of the Treasury Department itself.

In an exclusive interview with Fox News, the new Secretary of the Treasury Jack Lew said he’s out of tools to continue paying the government’s bills. October 17th is the deadline he has given as the last day he can pay the bills without risking default. Yesterday, the Treasury released a report saying a U.S. default could have a “catastrophic” effect on the U.S. economy. Given the economy’s already fragile state, the Treasury Department said that a U.S. default and its ripple effect through the global economy could lead to frozen credit markets, a plunge in the value of the dollar, skyrocketing interest rates, all of which could instigate a financial crisis mirroring that of 2008 “or worse.”

What Lew is saying is that if at any time (either now or in the future) the government defaults on its debt obligation – we will likely cause an economic collapse that would lead to a global economic depression. Since no one wants that to happen, the treasury’s plan is to continue paying our debt to avoid causing that collapse. In order to continue making payments on the debt, the government must take out more loans. Thus the debt ceiling must be raised, or we risk default. If you stated this fact in another way, you could say that the only thing preventing a global economic depression is the fact that the government can continue borrowing money and that if at any time in the future, it cannot do so – we will see a global economic depression.

The treasury knows that we’re now in a situation where we’re forced to continue borrowing money and raising the debt ceiling forever unless we’re willing to default on our debt and be the cause of a global economic depression. Since that is not an option any politician wants (because it would give them no chance of being re-elected) the only choice politicians have is to continue raising the debt ceiling and digging us deeper in debt. At some point, the debt will grow so large that we will not be able to pay back what we owe and a default will happen. It’s virtually guaranteed. But the hope of congress is that it will be far enough in the future that it won’t affect them, personally.

It’s become apparent that the unstated goal for Washington is to avoid any and all painful short-term consequences by adopting a policy that delays all consequences of excessive debt accumulation until a future date at which time, the politicians will either be out of office or in their grave. Washington has decided to trade short-term relief for long-term consequences that can only spell disaster for a future generation.

I don’t know what the solution is to this problem. Well actually, I do know what it is. It’s pretty simple. The solution would be to drastically cut all federal spending across the board, balance the budget and gradually pay down the debt over several decades. It could probably be done before we default.

Would it cause some hardship?
Of course.

The money this would remove from the economy would probably cause another recession or perhaps even a depression. That’s a short-term consequence we would have to live with in order to preserve a future for our children.  Making such a choice deliberately would not be easy. A lot of federal employees would lose their jobs and military bases would be forced to close.  Things like special interest subsidies and guaranteed student loans would end and many regulatory agencies would be eliminated. But the size of the Federal government and the power it has over us would be drastically reduced and that may not be a bad thing.

I would ask you to keep praying about this issue and contact your representatives in Washington. Tell them we need to find a way to preserve the future of our nation.