The Debt Ceiling Explained

A number of readers have asked that I comment on the current Congressional negotiations regarding the nation’s debt ceiling. It’s surprisingly straightforward.

Our country’s total money supply is simply the sum total of all claims on the promise of future labor – also known as claims on debt. This includes all promises from the individual on up to the nation as a whole.

If money is a claim on debt then what happens when debt defaults, as is happening in all walks of life?

Debt default means the particular promise of future labor will never, ever be completed. This has the effect of reducing the nation’s money supply by the exact amount of the defaulted debt.

What happens if the overall money supply shrinks too far? A smaller money supply will make each unit of money worth more, against a given set of goods and services. This creates a scenario where it takes fewer units of money to pay for something - i.e. worker salaries. Deflation is a direct result, and it will spiral downwards as more people either default on debt that they can no longer afford and/or refrain from spending.

There are many that incorrectly perceive increased prices of some goods as a sign of inflation. Actually, price increases are also a natural result of deflation – as companies seek to keep their revenue streams above the level of bankruptcy.

All of this explains why Congress has felt the need to deficit spend over the last three fiscal years to the tune of between $1.6 and $2 trillion dollars annually. They’re attempting to make more promises of future labor to replace the defaulted promises. The major banks have shut off most lending, on purpose in my hypothesis. This forces governments to issue more debt against their citizens (slavery) that these same banks will eventually own for the most part. What if Congress didn’t do this?

Our nation’s Gross Domestic Product (GDP) runs around $14 trillion per year. Imagine a reduction of $1.6 trillion from that level to $12.4 trillion. That 11.4% decrease in GDP would result in an instant, realizable deflationary depression.

Many would say that it’s better to take our medicine now, rather than continuing to create new debt on the backs of generations untold. I would agree with this in principle, except for the fact that taking our medicine won’t solve the real underlying problem – which is our money supply representing claims on debt.

If we’re going to have a national money supply then it needs to be issued by our US Treasury. It would then circulate into the economy as payment for completed labor. This would be much more biblical than issuing Treasury securities (promises of future labor) which make the citizens implicit slaves to the bondholders (primarily international banks).

It is only by changing who issues our money that we can then achieve success by cutting spending.

We see a circus being played out in the US Congress right now. There are some members who sincerely want to slash spending and pass a balanced budget amendment. This solution, within a debt-based economy and with the banks purposely not lending, would toss us into a depression.

There are other members who want to increase the debt ceiling, while pretending to make equal cuts in spending. There wouldn’t be a need to increase the ceiling if the cuts were made right now. The two would cancel each other out. Instead, they desire to push the cuts out to some future date. This would keep the lie going that our economy is “recovering”, all at the expense of our progeny. This “solution” is gutless political babble.

Lastly, there are those who want to increase or remove the debt ceiling with no significant cuts in spending. The concept of a debt ceiling is fairly unique to the US economy. These people have no economic moral base whatsoever.

There will be an agreement on increasing the debt ceiling at some point in the near future. The Republicans and Democrats will sacrifice the economic stability of current and future generations for a temporary fix which has no possibility whatsoever of working.

Again, the main point here is that our US Treasury needs to issue our money supply. Anything less is meaningless to a true solution.

Please send comments, or requests to be added/removed to brad@newfamilyeconomics.com.

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