Economic Reality Will Prevail, Even If The Debt Ceiling Is Raised.

English: Chart of the United States' debt ceil...

English: Chart of the United States’ debt ceiling from 1981 to 2010 in $ trillion. This chart tracks the debt ceiling at the end of each calendar year. Years are color coded by congressional control and presidential terms highlighted. Data source: http://www.treasurydirect.gov (Photo credit: Wikipedia)

The debt ceiling will go up in one form or another. But the economic reality, which we discussed in a previous post What Comes First Production Or Consumption, will eventually make it impossible to climb out of the debt hole we have allowed our politicians to dig us into.

The only way the Government fund’s itself is through the multi-layered process of taking from the production of private individuals in the free market. Taxing, borrowing, and counterfeiting money, are the three ways Government takes production from the private sector. Taxing is the direct taking of what we produce. Borrowing is a Government promise to pay back with interest, what individuals freely give to them in exchange for this promise. The only way this promise can be kept is through taxing future private sector production. When Government borrows to fund the original repayment promise, it doesn’t change the fact that Government will have to tax future private sector production. The only difference is the amount to be repaid will be more than the original amount of the repayment. When people continually pay off credit cards by using other credit cards, the interest payment will eventually grow bigger than the amount of principle which was originally owed. This reality doesn’t go away just because it’s Government debt. The difference between an individual in debt and the Government in debt is, Government has access to an ability to fund itself through the printing press, which would land any private citizen in jail if he tried it.

Government counterfeiting allows the Government to go into the free market and purchase anything, including buying their own debt. (Read about Currency Debasement in this previous post.)This is an exchange of nothing for something. If you counterfeit, it is theft. If government counterfeits, it is still theft, it is just legalized theft. This theft starts the process of consumption before production, which is the direct opposite of the economic reality that you must first produce before you can consume. This printing also creates misallocations of resources, capital, and labor, and these imbalances in the structure of production starts the slow decline in the amount that would have been produced. When the amount that is produced in the private sector is declining, government’s ability to fund itself also declines. Government won’t go down without a fight. they will try to find every possible way to keep funding their growth. (Watch out, I guarantee they have an eye on your IRA’s or 401k’s as a source of future funding, whether through direct taking, or mandating that it has to be invested in government debt instruments.)

Each Government intervention whether it’s taxing, borrowing, and printing, or whether it’s regulations and Government bureaucracies, if looked at individually, puts a brake on production. What is the effect on production if you look at these interventions collectively. (Read about Unintended Consequences of Gov. Intervention in this previous post.) The amount that would have been produced in an unhampered market will not be produced because of these interventions. Government is trying to take a bigger slice of a shrinking pie, a pie that is shrinking because of this Government taking. Government and politicians are trying to win the game of Russian roulette by adding more bullets to the revolver.

Read this article, “The Four Debt Ceiling Possibilities For 2013”, at zerohedge.com, for a more in-depth analysis. Here is a quote from the article,   “The budget of the US government is divided into “discretionary” and “mandatory” categories.

There is also a third category which is interest payments on existing debt but that is also mandatory. For a while now, the government has not been able to collect enough revenue to meet the demand for its mandatory payments (aka entitlements) and debt servicing (even at historically low-interest rates). That means that the government could cut the “discretionary” portion of its budget to zero – AND THEY WOULD STILL BE IN DEFICIT.

Please note here that the “discretionary” portion of the budget INCLUDES military spending. Even if that was cut to ZERO – the deficit would still survive. There is absolutely no prospect of ANY reduction in the debt of the US government (or most any other government) unless and until a meat axe is taken to “entitlements”. This would involve a HUGE dismantling of the welfare state, something that neither side of US politics wants to even discuss. The situation is that simple”

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2 Comments on “Economic Reality Will Prevail, Even If The Debt Ceiling Is Raised.”

  1. The worst pg to ever win a state title. Says:

    Loved it


  2. Good blog!

    I get annoyed when Keynesians make the point that debt held by a country’s own citizens does not pose a problem to that country in terms of overall debt level. Their argument seems to be that as citizens of that country they are both debtor and creditor. This totally overlooks the points you make in your article regarding production and misallocation of resources, but also overlooks the fact that this type of debt represents a massive transfer of wealth from the future to the present, from poor to rich.


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