June 14, 2011

Debt Ceiling Charade

“The conventional view serves to protect us from the painful job of thinking.”
—John Kenneth Galbraith

Why Even Have a Debt Ceiling?

Our regular readers know we’ve long said the cure for a heavily indebted government isnot to go further into debt.

A business may borrow more money to invest in developing better products, services, and marketing – all in an attempt to increase revenue, and profits.  And with that comes a serious, corresponding risk.  If things don’t go well, a business, which has increased its indebtedness without creating growth – can go, well, “out of business.”

Increased borrowing by governments is a different story.  Governments, for starters, are not businesses.  And it’s our opinion they are hardly ever run like a good one.  What governments “produce” is also debatable.  While the original intent of a government may, ostensibly, be to protect the rights of its citizens, we believe far less consideration is given by politicians and bureaucrats to the fiscal bottom line.  Based on facts, that’s at least what it seems like in the United States. As we look at the skyrocketing US national debt – it appears that many members of Congress turn a seemingly willfully blind eye to the national balance sheet.  How could it be otherwise when the US Government spends 40% more (via borrowing) than it takes in?[1] We believe such a massive, negative cash flow would typically indicate the terminal phase for any business.

As we watch the United States Congress debate yet another increase of the just hit debt ceiling of $14.3 trillion[2] (by another $2.4 trillion), we have to admit we are in awe of what is unfolding in our country.  While we’ve long warned our clients a fiscal fiasco of immense consequences is potentially on the way, to watch it gather momentum still affects us deeply as citizens.  We may be witnessing the unfolding of a monetary debacle with corresponding social consequences, which can only be avoided by swift and heroic measures.  Measures involving a lot of tough decisions and guts – two things we have scarce seen among many politicians who seem to be mostly concerned about not offending their constituencies.  That, and getting re-elected.

When we look at the chart below — we ask, “Why even have a debt ceiling?”

To the Point

Our clients pay us to give it to them straight – so here we go.

We believe the recent $trillions of government stimulus (money printing) has done little to help the economy – and, won’t.  It will, in our opinion devalue the Dollar — making it cheaper for the overly indebted U.S. Government to pay back its massive debt.  It will, we believe, also devalue the dollars investors have their savings denominated in (acting like a hidden tax on savers). Such massive money printing by the United States with little positive economic effect, causes us to not rule out the possibility of very high inflation, coupled with a depressed economy.  Actually, another economic leg down, coupled with substantially rising prices looks like it may already be arriving.  We’re not making this stuff up.  Here are some recent headlines:

“Underwater’ Homeowners Rise to 28 Percent: Zillow” (Bloomberg, May 9 2011)

“Home Prices in 20 U.S. Cities Decline to Eight-Year Low, Case-Shiller Says” (Bloomberg – May 31, 2011)

“Confidence Unexpectedly Slips to 6-Month Low” (Bloomberg — May 31, 2011)

“Fed May Signal Balance Sheet Will Stay at Record” (Bloomberg — June 1, 2011)

“Rising Gas and Food Prices Push U.S. Inflation Higher”  (New York Times – May 13, 2011)

“World Food Prices Hit Record High”  (The Telegraph.com.uk – March 3, 2011)

“Jobless Claims in U.S. Decreased Less Than Forecast” (Bloomberg – June 2, 2011)

“Congress Mulls Cuts to Food Stamps Program Amid Record Number of Recipients (ABC News – May 31, 2011)”

“Utah Law Makes Coins Worth Their Weight in Gold (or Silver)”  (New York Times – May 29, 2011)”

It’s our opinion the fiscal situation of the Unites States is dire. The country is massively, increasingly, and perhaps hopelessly in debt — and seemingly committed to what looks like highly unaffordable social spending.  And how does our government respond?  It borrows, and prints, and spends more money.  We don’t think we can personally do anything to change the scenario.  The situation may be so far gone our politicians can’t either. Substantially higher taxes could negatively affect the economy.  Severe cutting of entitlements such as Social Security and Medicare to an aging populace, or food stamps to the 44 million people on them[3], etc. — could cause widespread social unrest.

By the way, the chart below on U.S. food stamp recipients disturbingly speaks for itself…

What’s Next?

We believe more Federal Reserve Bank money printing – and government spending (“stimulus”) is on the way.  Along with the resulting continued devaluation of the Dollar (and most other global currencies not backed by gold).

Regardless of how the situation looks — it’s our constant opinion opportunity awaits on the right side of the trade.

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 economic circumstances. Others may feel free to contact us to learn more.


Stephan R. Ernharth, JD
Vice President
Ernharth Group

Go to www.ernharth.com/commentary to read past articles from our Economic Commentary series.

  1. http://www.politifact.com/virginia/statements/2011/feb/17/scott-rigell/rep-scott-rigell-says-united-states-borrows-more-4/
  2. Bloomberg, “U.S. House Defeats Debt Ceiling Measure” May 31, 2011
  3. ABC News   “Congress Mulls Cuts to Food Stamps Program Amid Record Number of Recipients” May 31, 2011)