Treasury has had to use accounting gimmicks to circumvent the law

Who’s to blame for this?
By Geoffrey Pike | Friday, November 6, 2015
Uncle Sam

The U.S. national debt ceiling had been frozen at just over $18.1 trillion. Since late January of this year, the Treasury has had to take “extraordinary measures” to keep the ceiling from being breached.

In regular English, this means the Treasury has had to use accounting gimmicks to circumvent the law. Since Congress did not have the political willpower to either raise the debt ceiling or actually balance the budget, this is what we were left with.

On Monday, Obama signed legislation that suspended the debt ceiling again. You could say this was a bipartisan effort to stock-photo-young-couple-with-baby-having-quarrel-about-financial-problems-focus-on-woman-299044637effectively nullify any notion of a debt ceiling for a while. And John Boehner (and now Paul Ryan) and the Republican establishment wonder why Republican voters are frustrated with their own party.

According to the Treasury, the national debt was frozen at $18.153 trillion last week. On Monday, it reached $18.492 and is now well over $18.5 trillion. In other words, the official national debt jumped by about $339 billion in one day.

The U.S. Treasury plays these accounting games to officially stay in compliance by borrowing money from other places — such as government pension funds. The entire government is just one big cycle of borrowing and kicking the can.

Imagine if a private company borrowed from its employees’ pension funds in order to meet its daily expenses. The executives might be facing jail time if they weren’t politically connected enough.

The U.S. government’s debt is fast approaching $20 trillion. Obama should be able to get out of office in time before it crosses that mark. Unbelievably, Obama took office shortly after the debt crossed the $10 trillion mark.

The U.S. national debt figure does not include the massive unfunded liabilities, which some estimates put as high as $200 trillion. These are not official debts but promises that have been made. It is mostly made up of Medicare, and then Social Security, but it also includes government pensions.

The national debt does include about $5 trillion in intragovernmental holdings, which is money that the government owes to itself. The biggest part of this debt is owed to the Social Security Trust Fund, which is essentially nothing more than a filing cabinet with a bunch of IOUs in it.

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The Debt vs. the Deficit

The terms “debt” and “deficit” are used in a rather sneaky way by politicians. The debt is the total amount that the government owes to other parties. The deficit is the annual shortfall of funds. The annual deficit gets added to the total debt.

When we hear someone (such as Obama) brag about reducing the deficit, he is merely bragging about slowing the rate of increase of the overall debt.

Imagine a family with $50,000 of credit card debt. They have been accumulating $10,000 per year in additional debt. Then one day, the father comes home and says, “I have some good news, everybody. We have cut our deficit in half. Our annual deficit is now only $5,000. We have really improved our financial management.”

Do you see the problem here? Instead of adding $10,000 per year in new debt, the family is now adding “only” $5,000 per year. So next year, the family will have $55,000 in credit card debt.

Nobody should be celebrating a reduction in the deficit because it is still a deficit. It is adding more debt. The whole idea is to stop accumulating debt and then to find ways to reduce it. You can celebrate a reduction in debt, not a reduction in the deficit.

The debt ceiling is basically a joke because it does nothing to prevent Congress from spending more money. Still, these suspensions of the debt limit are the worst. It is better that Congress and the president have to actually raise it to a specific number. It is better to see them go through some political pain.

The national debt first crossed the $1 trillion barrier under the Reagan administration. While Reagan has a reputation as a fiscal conservative, the total government debt ballooned over his eight years in office. In those days, a $200 billion deficit was almost extreme.

Now we have seen trillion-dollar deficits since the fall of 2008. Now that it is “only” in the $300 billion to $400 billion range, it almost seems like a success. But we have to remember that the debt is still growing a lot, even if not quite as quickly as before.

Who’s to Blame?

It is obvious that the politicians in Washington, D.C. are to blame, along with lobbyists and other cronies. We also can’t leave out the Federal Reserve, which enables the U.S. government to take on much more debt than would otherwise be possible.

The central banks in Japan and China each hold well in excess of $1 trillion in U.S. government debt. But these countries are not to be blamed for this. The U.S. Treasury likes the fact that other countries are willing to buy the debt at low interest rates.

While the politicians and all of the cronies seek to benefit by the government continually racking up more and more debt, we can’t lay all of the blame on them. At some point, we do have to hold the American people accountable.

In poll after poll, Americans say they want lower taxes. They say they want less spending. They say they want a balanced budget. But as soon as it comes to specifics, it is somebody else’s program that should be cut. “Don’t cut my precious government program.”

About two-thirds of the national budget is made up of military spending and so-called entitlement programs. It is almost impossible to get a balanced budget without touching these items at all. But the Republicans can’t even defund Planned Parenthood, which is a miniscule drop in the bucket, so what hope is there of defunding anything at all?

Until a large segment of the American population starts pressing for specific and significant cuts, we are not going to see a balanced budget.

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A Day of Reckoning

There is one other way that the budget will be balanced, but it isn’t going to be pretty when it happens. The laws of economics will finally be too strong of a power for the continued deficits.

The U.S. government has had a bit of free ride. China, Japan, and other foreign central banks have helped buy up debt. Investors still buy U.S. debt as something of a safe haven. And we know the Fed buys up debt when it is in monetary expansion mode.

It is rather unbelievable that the debt-to-GDP exceeds 100%. And interest rates are still near all-time lows. Japan is even more unbelievable with a debt-to-GDP well over 200%. The Japanese people feel some kind of patriotic duty to buy up their government’s debt.

When things go on for a while, we tend to think they will last forever. Most people cannot remember a time of double-digit interest rates. They can’t remember a time of high price inflation. They can barely remember when mortgage rates were at 6%, which was actually considered low at that time.

But this does not mean the current situation can just go on forever. That is the hope of the politicians and bankers who benefit from the corrupt system. Still, there is going to be a day when the U.S. government cannot sell its debt at low interest rates, and the Fed may not always be a willing buyer if we ever see price inflation get out of control.

As I mentioned, U.S. Treasuries and bonds are considered a safe haven. There is really no other instrument more trusted in the financial world. If we hit another major economic downturn, interest rates may fall even further. That is why I am still not advocating that anyone short the bond market — at least not yet.

A country cannot have its government just keep racking up debt with no consequences. There are already consequences in the form of lower growth and production. When the government spends money — as opposed to money being spent, saved, or invested by individuals and businesses — it misallocates resources.

So while government debt hurts future generations, it also hurts today. It is making everyone poorer today.

Despite what the Keynesians say, increasing government spending does not help the economy. It is the opposite. A reduction in spending would be helpful to the average American.

Unfortunately, it looks like we will only get a significant reduction in government spending when it can no longer sell its debt at low interest rates. It will be a painful period that we should be prepared for.

There will be a time to short bonds and bet on higher interest rates. We are just not there yet.

Until next time,

Geoffrey Pike for Wealth Daily

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