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The
debt limit will be raised.
Neither side will get its
way.
The
U.S. government always raises the debt limit. How else would the debt and the government have gotten so large?
Not
raising the debt limit means that
the government takes the
road to financial suicide. That step
would shock its creditors. The government would increase its own debt costs
dramatically. Washington is
not that stupid.
After this episode, budget-cutters will seek other remedies
to narrow the gap between
government spending and government revenues. They should have done that last December. They should have started cutting at that time, but they were naive
and afraid of losing
votes.
The
debt limit threat is not a viable threat for either side. Obama has to sign whatever comes to his desk. The Republicans cannot make draconian
cuts without some sort of American consensus. They
won’t do it. Obama wants his way
in forging such a consensus.
He can’t get it. He’s harping on a non-solution, which
is tax increases on higher income Americans.
The
debate simply showed stalemate and lack of consensus for anything
but moderate change. The debt
limit will be raised. The budget problem will not be resolved.
The
budget problem is very big and getting bigger. For the nine months of fiscal year 2011 to date (October 2010
to June 2011), the U.S. has paid
out $386 billion in interest on the national debt. The government has had revenues of $1,733 billions. Its
spending has been $2,705 billions. It borrowed $972 billion. That’s
$2,705-$1,733.
I
define a financial
or bond default as an interruption in paying
the stipulated terms on
the government’s borrowings.
Most of its borrowings
are in dollar terms, so that if it pays them off in depreciated
dollars, that is not a
default.
The
interest on the national debt
is running about 22.3 percent of the revenues. The government is in no immediate danger of a financial
default from not paying its interest. If the debt limit is
supposed to get us excited about financial default
due to non-payment of interest,
it shouldn’t. The government above all is going to pay
its bond obligations. That has priority
one.
There’s another
factor that looms large.
In order to avoid
default, the government has to pay
off the principal amount of the debt,
which is the face value
of any debt that is maturing.
I estimate that roughly 29 percent of the debt
matures in a year, and the
debt is about $14,300
billion. Therefore, each year the government has to pay off about $4,150 billion on principal in order to avoid default. It accomplishes this by rolling the debt over. That is, it issues new debt and uses the proceeds to pay off the maturing debt.
The
government has a rollover
risk. It might fail to get enough
new funds to pay off the maturing bonds.
The
government’s revenues are now
$1,733 billion a year, so
it cannot refund the $4,150 billion of maturing
debt from current revenues. It has no choice
but to roll the debt over. If it
fails to roll the debt
over, then its back is really against
the wall. If such a failure occurred, we can mention such hypotheticals as cutting spending or selling assets, but there is no way
that realistic cuts could ever
add up to enough to pay off bondholders if they refused to fund the U.S. government. The entire amount of government spending, including the borrowing is $2,705 billions. If every
bit of it were eliminated, the government still wouldn’t be able to avoid bankruptcy if bond buyers went on a massive strike.
If
the rollover risk ever came to pass, the government would have to seize assets, such as assets in pension funds. Any such scenario is a nightmare. It is government failure on clear display. It is blood on the streets. Consensus breaks down. Large battles
occur for which the current debate is a mere warmup
exercise.
The
government has borrowed
"short", that is,
its debt maturity is rather
short, and yet it has many expenditures that are long-term in nature. Many persons are relying on a continuing stream of government checks, and if they do not appear, they will be hurting
very badly.
This
scenario – inability to roll over a massive amount of debt – is not imminent, but it’s
a possibility because the
absolute amount of the debt has gotten so large. Even a partial realization of rollover risk via a withdrawal of some bond buyers from the market means that interest
costs will rise steeply. That will place enormous pressure on
the government too.
These kinds
of scenarios, based on a realization
of rollover risk or even a strong anticipation of it, mean that
U.S. debt is nowhere near as secure as it’s cracked up to be.
The
U.S. is having something of a free ride in the
bond markets. Any shock to the confidence in U.S. credit
will be very serious. If there is one shock, people will realize that there can be
more such shocks. Any failure to pay interest or principal on a timely basis is a negative shock.
This can only make the financial problem more salient, lead to greater reluctance to roll over debt,
and make more likely the
scenario of government’s inability
to pay its financial obligations. A bond default makes
further bond defaults more likely
and more serious.
A
bond default is extremely
unlikely because it means the unwinding of big government and the Empire. Presumably
legislators and Obama know this,
although we cannot be sure. They do not want to commit
suicide, but they might
do so inadvertently if they are stupid enough.
Any kind of
default sends a signal that
bond default becomes more likely.
That can start a run on the government in which its creditors
stop funding it. Poof! That’s the end of
the U.S. government. That’s
the end of the checks. Game over. A new game begins.
A
run is not imminent. There’s plenty of inertia in human affairs. The largest creditors (China, Japan, the
United Kingdom) are not pulling
out the rug suddenly. However, China is slowly abandoning U.S. Treasury securities. In a variety of countries, there is an unmistakable
move away from the dollar
toward hard assets. The rollover risk looks to be slowly coming
to pass. The creditors
are slowly withdrawing funding of the U.S. deficits
and debt. A gradual withdrawal can still lead to sudden problems and sudden withdrawals in discrete jumps. These processes are not necessarily linear.
If
the government has trouble rolling
over its debt, it may cram
it down into pension funds. Or the FED may again come to its rescue. Or it may make the FED come to its rescue. Does
any of this matter? All such desperation measures spell doom for the American economy.
If
our creditors say "No more", we’ve
had it. At that point, it’s best to wipe the slate clean and start over fresh. It’s best to cut spending. Better late than
never.
America’s welfare-warfare state is finished right now. It’s only a matter of time. It cannot be funded indefinitely
by such huge borrowing. The borrowers won’t roll it over forever. They have too many other
better alternatives.
Before the severe
cutbacks occur, we will struggle along with rising
interest costs, new and higher taxes, forced financing, asset seizures, and some retrenchments. Political economic life is coming into a rough and messy spell that
will go on for years. It will seem like
forever. It will be depressing. The arguments will get louder.
Inane proposals will fill the air.
It’s possible that
a large war will be engineered by the U.S. government in order to justify cutbacks.
The
American air will not be suddenly cleaned. There will be no fresh
start. There will be no reset. Instead, the powers that be
will continue to improvise and administer
messy arrangements that add to our problems
and create an atmosphere
of oppression and hopelessness, a
dreary political economic world. They didn’t reset the bad debts of the banks. They don’t want to reset money to gold. They
can’t reset Greece.
Major
powers mention a new world
currency ("bancor")
backed by other currencies and commodities (a
basket). This is an attempt
to stop funding America.
The U.S. won’t support
it unless it can neuter
the whole arrangement behind
the scenes. The bancor won’t solve the political economic problems of the BRIC countries or those
of the Middle East or Africa.
Rollover risk will be realized.
It’s the financial side of a larger struggle of
the major powers in the rest
of the world seeking their
independence from
American domination. Dollar hegemony is an aspect of American hegemony.
Both are being resisted.
In
this worldwide battle to divorce from the
American dollar and stop funding the U.S. deficits, the BRIC countries and others
will continue to increase
their armaments and enlarge their domestic economies. They will not rely so heavily
on the American market. These
trends will take decades.
World
government under American
control is being resisted. It won’t come
to pass. It’s too costly to achieve. Encirclement of Russia and China won’t succeed. Russia can ally itself
with Germany and France. China can
reach out to Africa and
South America and Asia.
Europe will prove a weak link. Conquest
of central Asia and the Middle East will prove impossible.
The
trilateral world of America-Great
Britain-Japan will not
come to pass. America will not rule the world.
Americans have a choice:
cut back the welfare-warfare
state or continue the quest for world domination.
If they do nothing or
continue the quest, the rest
of the world will stop funding
America and will build itself up militarily and economically. America won’t succeed, and the process of failing will be painful. America
will go backwards. It’s more rational to cut
back the welfare-warfare state. That too is painful.
That too cannot be done easily
and without many Americans re-orienting their thinking, plans, and lives. But in that choice, America will go forward.
Neither political
party offers the option of ending
the welfare-warfare state. Americans
don’t want that option, not yet. A lot
stands in the way of rationally
deconstructing the state and empire: a dysfunctional political system, political
divisions, ignorance, miseducation, and entrenched interests. Will Americans have to learn the
hard way?
Michael S. Rozeff
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