A Credit Card Without a Limit

The debt ceiling is one of the most frequently debated topics in politics and economics today, and for good reason. Last year’s government shutdown  and subsequent negotiations have shown that Congress, and the nation, have become more  divided as to whether or not our spending limit should be raised. Perhaps the question we need to be asking is not whether the debt ceiling should be raised, but what happens when we hit our “lending ceiling” as Peter Schiff would say.

The debt ceiling isn’t really an apt term for our borrowing limit since every time we get close to reaching it, we raise it, and for those in Washington, the sky seems to be the limit when it comes to spending. However, politicians have forgotten that there are two parties involved in this whole process; the debtor and the creditor. You can’t rely on the debtor to always do what’s fiscally responsible, since it’s more lucrative to consume when someone else’s money is on the hook, which is why the creditor is ultimately the one who determines how much you can borrow. What I’m getting at is this: we can completely eliminate the debt ceiling if we wanted to, but it doesn’t mean the rest of the world will lend us the money to do so.

China is our largest creditor, and because of our trade imbalance with China, people tend to make the fallacious argument that they will continue to lend us money so that we can continue buying their imports. But we need to realize that China will eventually stop throwing good money at a bad investment. Instead of selling goods to someone who can’t pay them back, the Chinese government will eventually realize that  their own people can start to consume what they produce themselves. China, a country with the largest population in the world, has more than enough demand to satisfy their production which means that Chinese citizens will be able to enjoy the fruits of their own labor and buy all the things we used to buy. Trust me when I say that China would rather lose money on $1 trillion in Treasury bonds than $2 trillion or $5 trillion.

People also tend to make the false assumption that because we have the ability to print the money we need to pay off our bills, that our problems are solved, as if there are no consequences to that. When a government defaults on its debt, it has two options: the first is to make an arrangement with its creditors where they get paid a percentage of every dollar owed (similar to bankruptcy for individuals), and the second option is to print the money. The two options are essentially the same; if you’re getting paid back 50 cents on the dollar or getting paid back the full amount with less valuable dollars, then what’s the difference? No matter how you look at it, China will lose.

The current national debt stands around $17.5 trillion. The United States is so indebted that we can’t even afford to pay back the money we owe with real dollars; instead we rollover our debt (pay off our debt with more debt), which is the equivalent of paying off your Visa with your MasterCard. The U.S. government believes they have the equivalent of a credit card without a limit, but what they’ll come to realize is that people will eventually stop accepting IOU’s and start demanding payments. When that day comes we will no longer be discussing the debt-ceiling, but rather the lending ceiling, and we will be forced to understand what it means to live within our means.

 

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