Six Degrees of Separation (from Financial Responsibility!)

06 May

Six Degrees of Separation (from Financial Responsibility!)

The National Debt Ceiling!

So once upon a time long, long ago (we have heard) America had a political class that thought the country should be managed responsibly.  Many of the founders were vigilant about the new Republic and abhorred the idea of it being buried in debt.

But eventually less responsible people took over.  When it became clear the debt was burgeoning out of control, this new class thought they could create a mechanical solution to “save them from themselves.”  If they could not be trusted to craft financially responsible budgets, they would create a statute that would cap their irresponsible deficit spending for them.  This was called “the nation debt ceiling.”

But it did not take long for even more reckless politicians – if you can imagine such a thing – to drift even another degree further away from financial responsibility.  Having left behind their own duty to be accountable, they soon found it necessary to minimize the restraint of the statutory debt ceiling.  They found that they could simply “raise” the debt ceiling to accommodate their deficit spending.  

Now, it is true that raising the debt ceiling every year or two tended to shine a spotlight on the metastasizing debt and their recklessness.  Since they did not like that exposure, they came up with yet another degree of separation from responsibility.  

They decided to minimize the nuisance of frequent debt ceiling increases by simply “suspending” the debt ceiling entirely for prolonged periods.  During those periods there would be no restraint on their spending whatsoever.  Each time Washington spends more, the debt ceiling automatically increases.  In other words, there is no debt ceiling at all.

Now a new monetary fantasy is taking over.  Since the Federal Reserve is buying larger and larger shares of US debt issuance with made-up money created with nothing more than a digital keystroke on a computer, why not simply cut out the middleman?  Why should the US Treasury borrow money and issue debt instruments at all?  Why not simply let the Fed create as much money as the politicians want to spend?

That is the promise of Modern Monetary Theory, which is all the rage in Washington now.  And you cannot get more separated from financial reality and responsibility than that.

To bring the story up to date, Congress voted two years ago to suspend the national debt ceiling until July 31 this year.   

 Over the next 12 weeks you will hear a fair amount about the nation’s already unpayable debt and about the debt ceiling.  We hope this short tale will serve as a kind of playbook as you listen to the political debate.  It will make clear that the only way to have a financially responsible nation is to have responsible people making decisions.  All other measures are simply added degrees of separation from responsibility.

When the monetary and financial system has become this far removed from responsibility, it is, as the saying goes, “every man for himself.”  

In other words, you cannot trust the system to protect your money and your wealth.  You must do so for yourself.  The bitter lessons of history teach that that is best accomplished by acquiring gold and silver.