August 5, 2011
A Compromsied Debt Ceiling
“To contract new debts is not the way to pay old ones.”
—George Washington
A Thought Provoking Hypothetical
We ask ourselves the following hypothetical question… If we knew of a business which currently had $14 million in debt (a debt which had roughly tripled over the last 15 years, with a credit line increased 10 times since 2000, and maxed out each time), which also had around $66 million in future liabilities – and while promising to cut it’s debt by over $2.5 million over the next 10 years, was asking us for a loan of over $2.4 million — we believe it would us take about 2 seconds to answer, “Of course not.”
The Ugly Truth in the Compromise
Well, if you add six zeroes to the end of the numbers in the hypothetical example above (changing the $millions to $trillions) – you pretty much have what the United States Government has asked for and decided to grant itself in the recent debt-ceiling compromise.
However, the fiscal situation of the United States is perhaps far worse when you look at the details.
The cold, hard, facts are that the United States Government has a national debt of over $14 trillion.[1] The national debt has roughly tripled over the past 15 years – and the debt limit has been increased 10 times since 2000.[2] The U.S. Government also has around $66 trillion of future liabilities at net present cost.[3] With the new legislation, it has granted itself the authority to go another $2.4 trillion in debt.[4]
Under the compromise, the new U.S. national debt ceiling permits borrowing to rise by another $2.4 trillion.[5] After ten increases of the debt ceiling since just2000[6](because the limit had been hit every time), we believe strongly the new debt limit will also be hit (in our opinion sooner than later), as the government will spend another $2.4 trillion. We see no evidence to cause us to believe otherwise.
More disconcertingly (and humorously, if darkly), the first $900 billion of the supposed spending “cuts” (really reductions in spending increases) include caps on discretionary programs (which have not been specified by the way – yes we are serious), spread out over 10 years.[7] And here’s another juicy little detail — since the caps are projected into the future, Congress can cancel or postpone them whenever they want, and for whatever reason they choose.[8] Seriously, you can’t make this stuff up.
The other $1.5 trillion in “spending” cuts will be decided on by a new “joint bipartisan committee”.[9] Specifically, this final $1.5 trillion of the $2.4 trillion in spending would only be available after the “committee” comes up with matching levels of additional spending “cuts.”[10] Again, knowing that Congress often calls a “cut” a decrease in the increase in spending, and that the “cuts” can be very non-specific – we currently have very little faith in real fiscal discipline here.
Now that Congress has extended it’s own credit line by $2.4 trillion, we’d not be surprised to see the Federal Reserve Bank print many more $billions out of thin air to purchase more government debt.
We simply see this latest debt ceiling compromise as doing nothing significant in getting real control of the mis-management of the United States Government’s fiscal situation. We do see it as a confirmation the nation is continuing to head down the path of monetary (Dollar) debasement, which we believe will lead to very high inflation.
As we watch the price of gold, considered to be real money for thousands of years (including for the first 100 plus years of the United States existence as the Dollar was backed by it) – we seem to be not alone in our opinions.
While there is a lot of tough reality going on out there – we maintain our positive outlook. That outlook is based on our belief that a bear market in one thing is often a bull market in another.
As we enter this critical time – now, more than ever – we believe investors need to focus on their investment strategies. Those readers who are clients are fully aware of the strategies we’re implementing in light of unfolding economiccircumstances. Others may feel free to contact us to learn more.
Sincerely,
Stephan R. Ernharth, JD
Vice President
Ernharth Group
www.ernharth.com
Go to www.ernharth.com/economic-commentaries to read past articles from ourEconomic Commentary series.
[1] National Review Online, “Raising the Debt Ceiling: A Symptom of the Bigger Problem” January 13, 2011
[2]Ibid
[3] Bloomberg, “Gross Says Debt Deal Fails to Make Significant Dent in Deficit” August 2, 2011
[4] Reuters, “The phony-as-a-$3-bill debt deal” August 1, 2011
[5] Ibid
[6] National Review Online, “Raising the Debt Ceiling: A Symptom of the Bigger
Problem” January 13, 2011
[7] Reuters, “The phony-as-a-$3-bill debt deal” August 1, 2011
[8] Ibid
[9] Ibid
