Debt Ceiling for Dummies

Let us see if we cannot simplify the current, bad-faith-based debate on the debt ceiling.

First, the debt ceiling is a statutory artifact, not found in the Constitution, which limits the amount of total debt the United States is allowed to take on to finance its day-to-day operations. In theory, once the debt ceiling is reached, and the Treasury Department has exhausted the various games it is allowed to play in "redeeming" other "bonds" held by government workers, and other illusory acts of legerdemain, the government is then, again in theory, allowed to borrow no more. Since the United States government currently borrows about 42% (Paul Krugman believes that 42% is "about a third," but he's an Ivy League economist, not a mathematician, and is not required to know how to divide 2.2 by 3.8, which would tell him that a government which receives $2.2 trillion in taxes and spends $3.8 trillion is funding only 58% of its expenditures; however, this is close enough for tenure at Princeton) of the money it spends, this presents a problem.

Let us analogize to a homelier situation. Suppose we allow the role of America to be played by Bill Zup D'wazoo, a currently unemployed Wal-Mart long haul trucker living in Fontana, California, in a house he purchased (when he was living with his estranged wife Nomo [go ahead and try it with the last name]) in 2006 for $450,00, now worth $175,000, maybe, with a mortgage (unpaid during the last two years) of $575,000 (Bill re-fied a couple of times, had a line of credit-- those were the days!). In other words, a Real American. Bill has been depressed during his 95 weeks of unemployment and has gained a couple of hundred pounds. Inundated during his employed days with credit card offers, Bill has two high-limit cards, with a balance of $8,000 on the MasterCard against a credit limit of $10,000, and $2,000 against a limit of $3,000 on the Visa. Thanks to the tough-on-banks credit card relief rammed through Congress by Obama and Biden, Bank of America and Wells Fargo, the issuers of the cards, have a hard time charging Bill much more than 30% per annum in interest on these balances, and if they do raise the rates to such usurious levels, they have to tell Bill they're doing it. Thank God we have someone in Washington fighting for the Little Guy.

Bill seems, in all respects, a reasonably accurate cognate for the United States itself, fiscally and even physiognomically, if that's a word and who cares if it isn't. But looks can deceive, as will become clear perhaps. By supplementing his UE payments (four weeks to go) with charge card action, and living rent-free (at least until one of his loan servicers can figure out exactly who owns his mortgage), Bill has not had it too bad. Bill, however, now has a completely trashed credit rating and cannot "raise his debt ceiling" by getting another charge card. All he can do, after August 2, when his unemployment checks stop, is charge things to his cards, and get cash advances (suh-weet! while it lasted) with his remaining credit limit of $3,000 on the two cards.

Now you see the problem. By charging against the limit, Bill also slams his ability to borrow money against the cards in order to make payments against those same cards. Plus, BofA and Wells Fargo don't really want Bill to borrow any more money; they're just dying to find some excuse, such as a missed payment, to cancel the cards altogether, because what do you think the odds are Bill are is going to come up with $13,000 when it all goes down the toilet? Exactly. Thus, the excruciating calculus of exponential growth: if Bill makes a minimum payment of $250 against the combined balance of $10,000 at the user-friendly rate of 29% APR, a loan-sharking rate allowed because so many credit card companies are headquartered in Joe Biden's home state of Delaware, then his balance moves to $10,250, the new basis for computing interest, and Bill still has to keep using the cards for necessary expenditures at the grocery store, gas station, and Pyongyang Luau, the Korean massage parlor out near the interstate. In short, the game is rolling up.

By contrast, the United States is in a much better position. The government still has a steady source of income, the income taxes paid by increasingly unemployed Americans. While these taxes only cover 58% of necessary expenses such as blowing up Afghan and Libyan villages, the United States is not going to "default" on its debt in the way that Bill is about to default as soon as he hits the $13,000 top, can't borrow anymore, and has his cards cut in two by Ahmed down at the 7-Eleven. The $10 trillion "public" debt of the USA is financed at a gold-plated average rate of about 2.5% per year, not that loser 29%, and that's only about $250 billion a year. True, there is also the problem of maturing Treasury bonds which must be redeemed (paid off), but in August, for example, that only comes to about $30 billion. (You're probably wondering about the "interest debt" owed to the intragovernmental "trust funds" at Social Security and Medicare, with principal adding up to another $4.5 trillion. God, you're so funny! That's why I like you.) So add it up: about $20 billion in interest, $30 billion in redemptions, we're at $50 billion, or slightly more than 25% of our monthly income. You could qualify for a good 4-br w/den 2.5 ba 3-car gar 3k sq ft like Bill has with a ratio like that.

Our credit rating will be fine, for a long time, as we continue to fund Medicare, Social Security, defense and the Pentagon's current twelve wars with the balance of 75% of income still left after paying China, Japan, and the Federal Reserve, the latter of which will just send the money back to the Treasury because...oh never mind. Or maybe some of those things have to go, a little bit or a lot. A 42% pay cut can impact the lifestyle pretty noticeably. Bill's a case in point: hardly ever gets down to the Pyongyang Luau anymore, and Nomo won't return his calls, except through her lawyer. Something about having to stay at least 50 feet away from her for the next three years.

The breathtaking elegance of national debt financing

It took me a while to catch on, but I think I've figured it out. In his new budget proposals, President Holograma has forecast really awesome numbers for federal revenue over the next few years which will gradually eliminate the deficit and restore America to prosperity. Since I can't really see how this can be accomplished with the materials at hand, you know, just looking around at the jobless situation and rather ungraciously noticing that the actual number of full-time jobs in the US of A is about the same now as in the year 2000 (about 130 million), I'm tempted to ask a question with the same initials as Win The Future, only different. I mean, how can the O-Admin project revenues for the feds of over $3.0 trillion for the fiscal year two years from now, and then rising sharply to $3.5 trillion right after that, when income currently is scraping along the bottom at under $2.2 trillion? That's a 50% increase in revenue in two years, and 75% a few years out!

Then it occurred to me: aside from the fact that Congress, in order to avoid a People's Temple scenario, absolutely needs to believe that such a thing is possible, the Treasury may have an ace up its sleeve. All that debt we're drowning in? Why not put it to work for us?

This is so beautiful it's difficult to write it down cogently, because my mind wants to race ahead to the thrilling conclusion and skip any intermediate steps. It's just that good. But one or two preliminary points: We all know by now that the Federal Reserve Bank has been indulging itself in something called Quantitative Easing for quite some time. They have bought all kinds of stuff, including well over a trillion dollars in mortgage-backed securities (MBS), but lately their focus has been exclusively on buying Treasuries in the "secondary market," primarily, naturally enough, from the Primary Dealers who in many cases did not actually "own" these "assets" which the Federal Reserve "purchased" for much more than a week or so. Using this "asset purchase program," the Fed has become the world's largest holder of Treasury "securities." (I just love all these sophisticated, reasonable, business-like terms in the context of what's obviously a huge Ponzi scheme.)

The Fed now owns well north of $1 trillion of such Treasuries, and under what's euphemistically called Quantitative Easing II, the plan is to keep "purchasing" Treasuries in the "secondary" market at least through June, at which point it will be extended again through QE 3, to QE 4, to QE n, to QE to the Moon. You may think to yourself that this is a somewhat ridiculous situation, for the "money" the Fed uses to "buy" such "assets" is simply a figment of Ben Bernanke's imagination. The "quantities" he's "easing" into existence are hallucinatory. Yet, and here's the beauty shot -- once the Fed "owns" these "securities," they earn "interest" just like everything else. Maybe the Fed "bought" the Treasuries with hallucinated money, but that doesn't mean the Fed isn't entitled to a return on its "investment." And where does the Treasury get the money to pay the Federal Reserve interest, or coupon payments, on the Fed's Treasuries? Glad you asked: from the Fed's program of Quantitative Easing. And to whom or to what is the money remitted to the Fed by the Treasury ultimately paid? Well, to the Treasury, because it's the Fed that holds the Treasury's checking account.

Are you impressed yet? I sure am. Under this program, the deeper the United States Treasury goes into debt, the more money it makes on the investments it makes by buying the debt it just created. Joseph Heller's jaw must be dropping at seeing the imagination of his creation, Milo Minderbinder, one-upped in real life. This is a can't-miss, fool-proof system for national solvency. So of course the federal government's revenues are going to go through the ceiling over the next few years. The federal government will be receiving all that money it owes itself regardless of what the unemployed taxpayers chip in, and the Treasury will be receiving all that income, just to skip a couple of confusing, irrelevant steps, from the money it creates out of thin air.

I don't see any reason the rest of the world's economies should be uneasy about the way we're dealing with Earth's reserve currency, do you? So completely straightforward, fiscally sound, and ingenious. It's one of the many ways we continue to be Exceptional.

Obama Serenity Prayer

My favorite Disneyland thrill when I was a kid was Mr. Toad's Wild Ride, which was a little scary, not too much so, with no nausea-producing, vertiginous changes in altitude or anything, just a ride through a kind of Gothic landscape of dark and vaguely spooky scenes. We should have a real life version of such a diversion beginning with the swearing in of the 212th Congress in about a month when the Republicans, with their huge majority in the House, man their battle stations. The Republicans already control the Senate, somehow, even if they only had, during the 211th, slightly more than 40 Senators, depending on which side of the bed Joe Lieberman got up on in the morning. They could have had 12 or 13 and they would have completely outmaneuvered Harry Reid. The Senate, as we all know, is the graveyard of good intentions. It does seem like a minor miracle that something so obviously right as repealing DADT could make it through that creaking, obsolete chamber, but thank goodness for such moments of grace.

Après ça, le deluge. Are you aware that among the new House of Representatives, only 35% can be counted as reliable votes for what us here liberals like to call a woman's freedom of choice? That's ri-i-i-I-ight. 53 of the new Reps are what the conservatives like to call pro-life.

Sobering, eh? Does this help put some of the Obama-pouting in perspective? Felt good, though, for a minute, didn't it? The lesser of two evils...think there will ever come a day when it's safe to move beyond such dreary calculations? I don't either.

Anyway, the chart above is from a recent New York Times article on the federal budget, which will loom large, early and often, in the Obama versus the Volcano 212th. For one thing, we'll have a debt ceiling "crisis" along about April. Mr. Mumbles & The Diva were not able to lift that sucker much above $14.3 trillion when they were "in control," and since we're currently at $13.9 tril, and we're adding to the national debt at about $2 trillion per year (never mind the "official deficit," that's the actual number), we are rapidly approaching a moment of truth, as General Buck Turgidson told the President in "Dr. Strangelove." You will recall, back in the glory days of Bill Clinton, that Newt (The Salamander) Gingrich had the creative idea of shutting the government down over a debt ceiling raise as a way of implementing his Contract On America over Clinton's objections. Only Clinton wouldn't blink, so the legend goes...now we have this group of Young Republican Turks suddenly in the ascendant, and the same opportunity presents itself, and instead of Clinton...see, this is where The Obama Serenity Prayer comes in. Lord grant me the Serenity to accept the things I cannot change...

No O-Bashing, remember. That's done. Looking at that Kansas-shaped schematic up above, where do you suppose these New Republicans will want to slash and burn? Do you think they'll want to take a big chunk out of Defense and Homeland Security spending? Tee-hee. I sort of doubt that. Now, the problem for the rest of us is that it's not as if the Republicans don't have cogent arguments for fiscal responsibility. Take, for example, the commonly accepted definition of "insolvency" for purposes of bankruptcy law: a general inability to pay one's debts as they come due. Elegant, isn't it? Does that apply to the United States? Well, I suppose you could answer no with a straight face. We have about $2.2 trillion in income yearly, and about $3.7 trillion in expenses, but we're able to borrow the difference at rates kept fairly low by the simple expedient of buying more than half the debt ourselves (huh?).

This is by far the most creative Ponzi Scheme ever devised. We borrow money to pay our enormous debts, we borrow money to pay the interest on the money we borrow, we borrow money to do everything, and we mostly borrow it from ourselves. The Federal Reserve is now the single largest holder of American debt in the world, with over $1 trillion of our own paper.

More than China. Guess we have to change that old saw about borrowing "from China" to do this and that, huh?

We don't need China. You think I'm making this up, but I'm not. This is the great innovation of the Bernanke Federal Reserve. Well, actually he's responsible for two changes, both ingenious. The first of his ideas was to turn the Federal Reserve into the Ultimate Bad Bank. This is confounding his critics; he's driving them nuts with it. You see, when The Bernank launched QE One, where he bought up all that securitized mortgage crap from the Wall Street banks and others, everyone predicted disaster. All of that sludge would go bad, about $1.3 trillion worth of it. But what Bernanke knew, and no one else seemed to appreciate, is that it doesn't make any difference. The Federal Reserve cannot have a solvency problem because it makes up for bad assets on its books by simply hallucinating more "money." So once Bernanke had that insight, there was no stopping him, and certainly Obama does not know enough about such arcane finance to even try. Thus, Bernanke's Next Big Thing, his true Flash of Genius, was to extend this idea and allow the Federal Reserve to be the principal buyer of U.S. debt! Don't you see how brilliant that is?

So why would the Republicans want to cry wolf about the national debt? There is no national debt, not anymore. Why are we even paying taxes, that's what I don't understand. It's quite possible that The Bernank will think of that next, you know. The Dude is Santa Claus. He's got the beard and everything. He's got all bases covered. The national banking system is moving toward solvency because Ben has taken all of their bad debt off their books and put it on the Federal Reserve's, where it doesn't matter. He's solved our problem of insufficient income by declaring the existence of additional trillions with which to buy our own debt. He's done it all!

His critics, including his foreign critics, cannot figure out why he's wrong. It's like watching David Copperfield make an elephant disappear from a theater stage. That cannot have just happened, and yet it did. Since countries like China, Japan, the Middle East petro-states have so much invested in the dollar, they can't do much except go along with the gag.

Well, prophets are not much appreciated in their own time. Ben Bernanke is a stone genius, pure and simple. It's magic, what he's done. And if these rambunctious idiots soon to infest the House will just stay out of his way, everything will be fine forever. They need a Serenity Prayer of their own. There are no debts. There are no deficits. Lord, help us to realize that The Good Bernank has saved us, rising in the East (Princeton), and come to Earth to deliver us all. A true Judeo-Christian Christmas Story.