Snowballs are a fun, happy image of wintertime play in childhood for most. Not in this post.
The longer you roll a snowball, the bigger it gets. The largest snowball ever measured was thirty-three feet in circumference and was rolled by students from ASME Michigan Technological University, in Houghton, Michigan on March 29th, 2013. The biggest snowballing ever measured is our national debt at $20 trillion as of this week. Over-spending begets debt, which begets higher interest service, which begets more over spending, which begets more debt.
As of today, the new administration will be running a government that is up against its legal borrowing limit. The federal debt limit was suspended by Congress and the president in November 2015, but is set to be reinstated today and, absent a miracle, the Treasury Department will be forced to take “extraordinary measures” to ensure the continued functioning of the federal government’s finances.
The CBO projects that these extraordinary measures will enable the federal government to pay its bills until sometime this summer. White House Press Secretary Sean Spicer recently addressed the issue at his press briefing. “I think we’ve got a few months to do that,” he said, regarding addressing the debt ceiling.
Congress created the limit on borrowing with the 1917 Second Liberty Bond Act, and every few years since, Congress has voted to raise it. Before this act, the Treasury had to ask Congress every time it wanted to borrow more money.
But going into WWI, asking so often would become cumbersome, so Congress basically gave the Treasury a credit card and said, “Don’t spend more than X.” The debt ceiling has been raised 74 times since 1962, including 18 times under Ronald Reagan, eight times under Bill Clinton, seven times under George W. Bush, and five times under Barack Obama. This is the non-partisan issue.
Raising the ceiling doesn’t authorize new government spending. That happens when Congress votes to allow new spending bills. It just lets the Treasury borrow more money to pay for spending that has already been approved. It’s kind of like the force of gravity pulling that snowball down the hill. The hill we’ve rolled this thing on was a gradual slope at first. About $43 billion at the end of WWI before taxes went up sharply afterward to pay down the debt we accrued in paying for our participation in the war. That happened again after every war we’ve been in, except for Korea (which we paid for from cash flow by raising taxes and keeping them high for over a decade), until the one we’re in now. Yeah, the one we’ve been in since 2001 and has no real end in sight.
If we ran our business or household finances like the government runs its finances, we’d have found ourselves on the street a long time ago. But the decision-makers aren’t using their money, they’re using ours. Our children’s and our grandchildren’s to be more specific. So they don’t wake up at night worrying about how they’re going to pay the bill the way we do.
Here’s the thing: the Treasury and the Federal Reserve have been working to keep interest rates low for decades, not so much to facilitate a growing economy, but to enable continued government profligate spending through ever higher debt. But when outstanding debt reaches a certain point, your creditors begin to demand higher interest rates to lend more. Then you have to borrow more just to make the payments on the money you borrowed and spent before, and the rates climb even more. Then taxes go up to support the ever-increasing payments and people have less to spend so the economy grinds to a halt.
Are you seeing the snowball yet?
Odds are, the two sides of Congress will feign disagreement over raising the debt ceiling, but eventually agree to keep rolling the snowball. But soon it will start crushing economies in its path. Wait, actually it’s already doing that. Emerging market governments and companies are scrambling to cover debts as they have to pay more and more interest to lure lenders. No, it’s not unique to America. But has reached a level of largesse that is uniquely American, and has run over into the global economy over the years.
Aside from the reporter posing the question to Mr. Spicer this past week, I’ve heard very little about this in the news. Media feeds us what we really want. More scandalous garbage like wiretaps, bathroom foot taps, and all the other distractions we’re hungry for. We’ll start paying attention when its rolling over us.