Debt Limit Debate Solution?

Virtually every day we see headline news about the ongoing negotiations regarding the possible increase in the Federal Debt Limit.  The predictions of doom and gloom if the debt ceiling is not raised are rife with hyperbole and statements that the world as we know it is at an end.   Timmy Geithner who can’t be trusted to do his how tax return is one of the chief proponents preaching this hell band brimstone version of what will happen if the debt limit is not raised on August 2nd.

Why we are trusting him now with trillion dollar decisions is beyond me but the guy in the White House keeps pushing him out there to tout the party line.  Of course Bernancke who wants to be a rock star makes his pitch on a regular basis.   It is true that attending to our debt problems are very important if we want a future with any economic growth and a standard of living reasonably close to that which we have enjoyed historically.  Of course the Feds will continue to collect money after Aug. 2nd the question if how much and how it will be spent.   The income stream doesn’t come to an end on that date.   Of course we won ‘t have enough money to pay all the bills due at that time.  We haven’t had enough for a very long time now.  We have been living on borrowed money and credit to meet our obligations.  What we are asking Congress to do is just like any borrower going to the bank would do when he can’t pay his loan.  He will ask for an extension and an even larger line of credit with a promise that things will get better down the road and he will catch up sometime down the road.

Of particular interest is the statement that we simply will be out of options if the debt ceiling is not raised.  That we couldn’t survive without a default on our debt.   That is not true.  In addition to the cash stream we will have coming in we can also service the debt and interest by having the Fed simply print more money and buy the Treasuries that are coming due on and after Aug. 2nd. Folks forget that the Government can’t print money; that is what the Fed does.  That is one of the main reasons the Fed was created in the first place to take the power of simply printing money out of the hands of the politicians.    All those thousands and thousands of outstanding Treasuries obligations are coming due at different times .  Some of only a few months long, some a few years like the 2 and 5 year notes and then there are those the stretch out for 30 years.  When Treasuries come due after Aug. 2nd the Fed could announce that they would buy the Treasuries at full face value with interest.  The holders of those Treasuries would be paid in full, there would be no default.

What is scary is that no doubt those brains at the Fed and Treasury have thought of this already.  I am not the smartest guy in the room but they are supposed to be.   Of course there are downsides to doing this.  The first is the obvious one of inflation.  But helicopter Ben keeps assuring us that inflation is nothing to worry about.   They have already printed up a couple of trillion of extra money in the last couple of years, what’s a few trillion more?  

Then the buyers of our Treasuries might get pretty leery of this method of payment and view it as the gimmick it would be.   Every time they get paid it would be with inflated dollars.  Regrettably we are dependent now upon a very sizeable portion of our Treasuries being bought by foreigners.   The Chinese and others might become reluctant to keep buying them.  They have already cut back on the amount of their purchases and they could cut back even more.   That is the real problem we face.  That our creditors might decide to not lend us any more money.  That is why we need to start balancing our books and using legitimate numbers with our books.  They are not required to loan us money.   They have a choice.

The Fed could later forgive the notes  if they so chose.  After all they pay dividends to the member banks and to the Treasury.  They could simply credit the payments due to the Treasury with the matured notes they bought.   For the really slow ones in class, this is not a suggestion, it is a fear that someone might actually do it.  We need financial discipline at the Federal level and elimination of most Fed regulations so our market system can save our bacon again as it has so many times in the past with we faced difficulties.

Thank goodness the weiner roast season is over early this summer.  www.olcranky.wordpress.com

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