Monday, July 25, 2011

How to Solve the Debt "Crisis"

I'll let you in on a little secret---there is no debt crisis.

What?!?! Then, what is all the noise about? If Congress doesn't pass a deal, the US will default on its debt and all hell will break loose.

Well, I'll admit that is one interpretation of what can happen, but most political "experts" seem to think that is the only interpretation. In fact, the "crisis" results from Congress providing contradictory instructions, on one hand requiring a certain level of spending, on the other neither providing the necessary revenues nor debt issuing authority to match those prescribed spending levels. The job of the US executive branch is to execute the instructions of Congress. But, in this case, that is impossible. The executive branch cannot follow the instructions of Congress, so it must do something reasonable. The two main choices are (1) default on bonds while cutting Social Security, Medicare and other payments, or (2) keep issuing debt. The first choice will create a shock, both to those who depend on payments from the US government, as well as to those who hold US debt. The second choice will be met with all the drama of an inchworm moving across a deck railing---snore.

Former President Clinton says that he would choose option #2. Who wouldn't? Yet, Obama and Geithner have ruled out this option. Presumably, they have made this declaration for negotiating purposes---the Republicans are less willing to negotiate if Obama is standoffish. Option #2 even has explicit legal backing. The 14th amendment clearly states that US debt shall not be questioned. This debt was created when Congress issued instructions creating a gap between spending and revenue. So, there is little reason to stop selling bonds unless one wants a true crisis.

1 comment:

  1. For a PHD (in whatever), this is the dumbest most sheeplish opinion I've heard. complete avoidance.
    Do you even understand how money is created?

    I'll give you a hint, the IRS was created in the following year.