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Blowing Off The RoofFriday September 8, 2017
But this week the news dropped that President Trump had made a “gentleman’s agreement” with Senate Minority Leader Chuck Schumer to permanently scrap the “debt ceiling” so that government borrowing can occur perpetually without the need to air the nation’s fiscal dirty laundry. Given how much the national debt has exploded in recent decades, and how reluctant Congress has been to address the problem, it should be no surprise that the proposal has finally been made. The only shock is that it happening when the Republicans control the White House and both houses of Congress.
The news came just a day after the President stunned the Republican party by abruptly siding with Congressional Democrats over the best way to deal with current debt ceiling negotiations. These developments should make it clear, as I described in the weeks after Trump moved into the White House, that budget deficits during the Trump administration will be far larger than just about anyone predicted. In fact, the self-proclaimed “King of Debt” is reaching for his crown and the coronation profoundly affect the fate of the U.S. dollar and the American economy.
Trump came to the White House with essentially no history of stated aversion to government spending and debt accumulation. Instead, he won the votes of Republicans and some independents by staking out extreme positions on immigration, terrorism, and economic nationalism, and by thumbing his nose at a political establishment much deserving of ridicule. Unlike almost all other Republicans, he had nothing to say about fiscal prudence, limited government, entitlement reform, spending cuts, or balanced budgets. In fact, he very rarely criticized government for being too large, but simply for being too stupid.
But as a businessman Trump had made his successes by borrowing, and then by borrowing even bigger when his ventures fell deeply into the red. There really should have been no doubt that he would bring those instincts with him into the Oval Office. Republicans who thought otherwise have no one but themselves to blame for what the future holds.
The debt ceiling came into existence just a few years after the Federal Reserve was created in 1913. At the time that the bank was established many politicians, and certainly many citizens, were concerned that it could potentially lend unlimited funds to the government, a capacity that could short-circuit constitutional checks and balances and lead to the development of a Federal behemoth. As a result, the Fed’s original charter prevented the bank from buying or owning obligations of the U.S. Treasury. This provision allayed the fears of unlimited borrowing and it helped Congress approve the Act.
In fact, voting to raise the debt ceiling was always politically embarrassing for Republicans. To provide cover the measures were usually pared with some other politically popular legislation. In many cases some Republicans would be given the nod from leadership to vote no, as they could cast their votes against it knowing it would pass anyway. But eliminating the ceiling makes it that much easier for Republicans to campaign one way and govern another.
But the potential failure to raise the debt ceiling has never been the problem. It’s the debt that’s the problem, and the ceiling is a tool to solve the problem that vote-seeking politicians are afraid to actually use. If we eliminate the only tool, the problem will never be fixed. If the debt ceiling were to be cut out like an unneeded appendix, we should expect that America’s foray into debt creation, which has already been fantastical, to journey even farther into the looking glass. America’s funded national debt is already just a few clicks below $20 Trillion. If we were able to amass that much debt with a ceiling, even one that could be raised, imagine how much more debt will be run up with no ceiling at all!
In the end we may be able to repeal our self-imposed debt ceiling, but our creditors may not care. When we drop even the pretense of a theoretic limit to our profligacy, our lenders may decide its time to impose a lending ceiling of their own. That is a ceiling we have no power to raise, and it could force our leaders to finally make some very unpopular choices. Massive cuts to government spending, including to current Social Security and Medicare benefits, huge middle class tax hikes, or an actual default on the national debt. Since neither of these alternatives is politically viable, I believe the coward’s way out will be a massive QE program where the Fed buys the bonds our creditors no longer want. This could be the worst possible choice for the U.S. economy, and investors should be prepared. It could produce a dollar and sovereign debt crisis that will dwarf the financial crisis of 2008 with respect to its impact on the American economy. It could make hurricane Irma look like a sun shower.
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To order your copy of Peter Schiff's latest book, The Real Crash (Fully Revised and Updated): America's Coming Bankruptcy - How to Save Yourself and Your Country, click here.
For in-depth analysis of this and other investment topics, subscribe to Peter Schiff's Global Investor newsletter. CLICK HERE for your free subscription.This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License. Please feel free to repost with proper attribution and all links included.
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