Monday, October 7, 2013

Mr. Boehner and the Debt Ceiling

The Congress has passed debt ceiling legislation for many years pandering to voters who worry debt is sin, or a symbol of excess, or brings economic collapse. As the economy grows debt grows creating a repeated cycle of debt ceiling votes. Taking a vote gives a minority of politicians an opportunity to make politically correct statements about the excesses of government and their noble efforts to limit the excess. Then the majority makes the only sensible decision and votes to raise the debt ceiling.

I have never heard a politician of either party try to explain the difference between Federal debt and all other types of debt, both public and private, even though at least some know the difference. Current threats to limit the debt and cause a default are not only irresponsible but unnecessary and put Mr. Boehner far out on a shaky limb.

Federal debt is unique among debt because the Federal government determines the money supply, always a human decision. In the United States money is nothing but a number held on double entry accounts. Coins and currency are assets to the non-banking public but a liability to the treasury and the Federal Reserve Bank. Personal and business bank accounts are assets to the banking public but liabilities to banks. Therefore, money is a non-interest bearing liability while federal debt is an interest bearing liability. In effect, money is non interest bear debt.

At any time and in any amount the U.S. Treasury and the Federal Reserve Bank can arrange to convert interest bearing debt to money, and allow payment of the government’s bills without default. They could pay off the entire federal debt in a day or two but they will not because it will increase inflation and their aim is to manage the economy in the best interests of everyone.

All previous presidents and the Congress have always played the debt ceiling game by the rules, which allowed everyone to max out on politics and then raise the ceiling. No one has questioned the authority of Congress to interfere with the constitutional requirement for the President to manage the government’s finances and pay the bills. The people who believe in debt ceilings want us to agree the Congress can pass legislation that prevents the President from doing duties spelled out in the constitution.

The President has whatever authority he needs to avoid default even if the Congress decides to be irresponsible and votes default. For Mr. Boehner to win the debt ceiling battle and push the government to default the President has to fail to do what he is able to do to stop it.

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