A video on YouTube called “The Debt Limit Explained” by CGPGrey (cited below) is a good
primer on how federal budgetary, taxation, spending and deficit policies
and procedures are supposed to work in theory, and it basically lays out
how the system has worked, until 2008.
Recall that then-Senator Obama railed against President Bush’s requested
increase in the debt ceiling as being “unpatriotic” and “irresponsible.” On the floor of the Senate, he said "The fact that we are here today to debate raising America's debt limit is a sign of leadership failure." So taking a lead from the video, weren’t his
fellow Senators in charge of the budget and federal spending? The Senate was controlled
by the Democrats and the president was a Republican, and it was an election
year.
So move to today, 2013, and see how the situation is further
removed from theory. Working against the theoretical model, described in the referenced video, are six factors in today's practice of that model:
- There has not been a budget passed by Congress since 2009.
- The FY 2009 spending level was increased from about $2.5 Trillion annually to about $3.5 Trillion because of the $800 Billion added by the American Recovery and Reinvestment Act (“the stimulus bill.”) Without annual budgets, every year thereafter the spending level has been carried into the next year, and so appropriation and authorization bills passed by the House and Senate automatically increased as well. (That is a rather convoluted process but I think I summarized it in one sentence fairly well.) As a result of failure of Congress (read “Senate”) to pass budgetary restrictions on spending, we’ve entered an era of hyper-deficit spending without recourse. The House has tried to pass a budget to limit spending (not reduce the current levels but just reduce the annual increases in spending) to see the bill die in the Senate without even being considered.
- Then there was another huge block of money authorized under the “Troubled Asset Relief Program” (TARP.) This program was initiated under Bush but supplemented under Obama. The program has become something of a ‘slush fund’ by the Administration because the repaid money (by the bailed-out banks) was not returned to the General Fund but retained by the Administration for other ‘stimulus.’ It has been an on-going drain on federal spending.
- Entitlements make up by far the biggest percentage of federal spending (about 60% -- defense in comparison runs about 25-30%) and the entitlement programs have been on “autopilot” without much Congressional oversight, such as food stamp program. The latest so-called Farm Bill includes a rubber stamped Administration request for expansion of the program – after all, who is against feeding the poor? – and food stamps now make up over 80% of the Bill. The program has been expanded to cover families making 125% of the poverty level, and there isn’t much check on who is eligible.
- The president has much more discretion in spending than the video implies. Let’s say Congress appropriates $600 million for transportation projects. That money can be shifted by the Secretary of Transportation to virtually any use he wishes, such as ‘green energy’ savings.
- The
fuzzy math of the Patient Protection and Affordable Care Act (“Obamacare”) is
adding to the deficit without oversight/approval of Congress. There were blank checks inserted to
allow the Secretary of
Now, “monetary policy” is different from
“fiscal policy” because the first is managing the entire economy, what it uses to transact business,
i.e.—the dollar, or money, and the second is the taxing and spending done by the federal
government. “Fiscal policies” are set by
Congress and the Treasury Dept.
“Monetary policy” is the purview of the Fed, as it sets interest rates
for prime loans (to banks) and thereby the available money supply in the entire US. Then there is one other power of the Fed: It can “create
money” by adding fictitious numbers to its own balance sheet. More on that below.
The issue of the deficits run up by Congress and the President is compounded
by a set of actions recently taken by the Federal Reserve as it reverses a long-standing
position it adamantly held (or rather the Chairman of the Fed, Mr. Ben
Bernanke, has reversed a position.) He
testified at a Congressional hearing in June 2009 that the Fed would not “monetize
the federal government’s debt,” meaning the money that the Fed creates out of
thin air would not be used to buy Treasury notes (the bonds sold to fund
the federal government’s deficit spending.)
Beginning in 2010, that policy has been replaced by “quantitative
easing” which is exactly what he said the Fed would not do.
What’s that you ask?
Can the Fed actually do that? You
thought only the Treasury Dept “prints money” and that is where money is
created? Actually, printing currency, as
the Treasury does, has nothing to do with how the government SPENDS money. Those fresh new bills coming from Treasury printing presses are purchased by banks and held in their vaults until demanded by their
customers. (Anyway, only about $10
Billion in currency is printed each month, not near enough to cover the $4
Billion per day needed by the federal government for its deficit spending.) The money “created” by the Fed – just
by adding zeros to the bottom of its balance sheet – is now being used to buy T-bills, and
that money is then funneled directly into the economy by government spending.
This is the greatest danger to our economy at present,
because “printing money” has never worked and it has always ended badly,
usually resulting in hyperinflation.
Examples are: 1779 Continental dollar (from which grew the expression
“not worth a continental,”) 1801 French franc, 1919 Russian ruble, 1923 Weimar German
mark, 1979 Argentine peso, 1980 Brazilian real, and 2008 Zimbabwe dollar. The US
also entered a period of inflation in 1864 when the “greenback” hit inflation
rates of 40%. I recall in the late
1970s, the US dollar inflation ran at about 10-12% -- it was a difficult time
to save money or to forecast what anything might cost a couple of months into
the future.
If the trend to "monetizing the debt" isn't stopped soon, the economy will collapse. That is almost as bad as the government "defaulting," which is unlikely since the government's income (funds received in taxes and fees) far exceed interest owed each month on the total debt. So far.
Website: http://www.cgpgrey.com/blog/the-debt-limit-explained
