10 Crazy Things About The Debt Ceiling Crisis

Rex Nutting MarketWatch July 25, 2011

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July 25, 2011, 12:01 a.m. EDT

By Rex Nutting, MarketWatch

WASHINGTON (MarketWatch) "” For pure silliness, ridiculous ideas and crazy arguments, you can't beat our current debate over whether we should raise the debt ceiling or throw the global economy into the toilet again.

How should concerned investors respond to uncertainty over the debt-talks outcome? MarketWatch's Mark Hulbert discusses the matter with John Bussey and Alan Murray of the Wall Street Journal.

Here are the 10 silliest, stupidest and most logically absurd things I've heard about the debt ceiling, in no particular order.

1.) First of all, the very idea of the debt ceiling is ridiculous. Like the human appendix, the debt ceiling is a vestigial remnant of history that does no one any good. You only notice it when it's causing pain.

The debt ceiling does not provide a meaningful check on government spending. Congress does what it wants and then adjusts the debt ceiling to accommodate the deficits it votes for. If you want to control the debt, you should look to the budget, appropriations and taxation bills, not the debt ceiling.

In practice, a vote not to raise the debt ceiling functions as a sort of fiscal confessional that enables sinners to soothe their guilty consciences for having just voted for deficit spending. For instance, almost all House Republicans voted earlier this year for a 2011 budget that locks in a deficit of about $1.4 trillion. And they voted for a budget resolution that would create almost $7 trillion of debt over the next 10 years. Voting against raising the debt ceiling doesn't change those votes, but it does make those lawmakers feel better about themselves.

2.) Defaulting would be "?no big deal.' The people who say this simply haven't thought through the implications of the U.S. government not paying its bills. For starters, it would make the debt problem much worse. Interest rates would permanently rise, the financial system would seize up temporarily, and a recession would certainly result from slashing government spending by 10% of gross domestic product for more than a few weeks. Remember, one definition of a depression is a 10% drop in GDP.

3.) Defaulting would be Armageddon. Default would be pretty awful, but the sun would come up the next day. Countries have defaulted before, and lost their triple-A rating, and they've managed to recover and even return to the markets for loans. There are things worse than temporarily defaulting on our debts, such as permanently reneging on our promises that we'll take care of each other.

4.) Congress can pass just the buck to Obama. This is the plan proposed by Senate Republican Leader Mitch McConnell, who suggests a legislative sleight-of-hand to make President Obama responsible for the debt ceiling. Sorry, Mitch, but if you read your Constitution, you'll find that Congress is responsible for the debts, the spending and the taxes. Man up.

5) Tax increases are off the table and 6) Cuts to Social Security, Medicare and Medicaid are off the table. These ultimatums are pure politics. Americans are not overtaxed, either in historical terms or in comparison with other advanced nations. With revenue as a share of GDP at the lowest level in decades, we can stand to "enhance" revenues a little. We do have a revenue problem.

By the same token, however, entitlement programs are part of the long-term budget problem, so they should be part of the solution. Remember, deficits are the result of spending exceeding revenue. Both sides of the equation count.

/quotes/zigman/4868283 10_YEAR 3.01, +0.04, +1.42% No debt crisis here The U.S. government can borrow money at very low interest rates.

7.) The debt is an immediate threat to our prosperity. Please! The U.S. government can currently borrow at very low interest rates. If government borrowing were really crowding out private investment, you'd see it in the bond yields. We can afford to repay our debts, easily. We have time to fix this.

8.) We must cut government spending immediately. Balancing the budget immediately would be a catastrophe. Even large budget cuts would make the very weak recovery stall. It's simple arithmetic: What the government spends becomes someone's income, which they in turn can spend. Cutting government spending (or raising taxes) means cutting disposable incomes, and that means cutting economic growth. That's why we don't want any of this budget balancing to take effect for at least a couple of years. Once growth is stronger, the government can reduce spending and raise taxes without hurting the economy.

9.) We should listen to Standard & Poor's and Moody's when they tell us to reduce the deficit. These are the folks who missed the greatest bubble in history and are now trying to make up for it by causing another recession. Even if the debt-ceiling crisis passes, they've threatened to lower our credit rating, even though we can easily afford to pay back our debts for the foreseeable future. Who elected S&P and Moody's to decide how we'll run our affairs?

10.) We can "?mint" our way out of this mess. This is an idea that's bouncing around some of the blogs. The basic idea is right: The Treasury doesn't actually need to borrow any money at all to pay our bills. Why not? Because we live in a world of fiat currencies, in which the Treasury can unilaterally create money out of thin air. Read Joe Firestone's explanation.

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Instead of borrowing the money, we could use seigniorage to create it.

So, the idea to get around the debt ceiling is for the Treasury to mint a one-ounce, $1 trillion palladium coin and deposit it in the Treasury's bank, the Fed. (Under the law, the monetary value of any coin has no relation to its metallic value.) The Fed would credit $1 trillion to the Treasury, which could use it to pay our creditors.

It's a brilliant and creative idea in theory, but in practice it would be almost as devastating to the full faith and credit of the United States as a default would be.

If this gimmick were used only once in an emergency, that'd be one thing. But once the government got the idea that this sort of alchemy is an option, it would use it all the time. Inflation "” perhaps hyperinflation "” would result from overuse of the alchemy/seigniorage option. Don't go there.

So what should Congress do? It's pretty simple. Pass the increase in the debt ceiling so we can pay our obligations in full and on time. Then have lawmakers do their damn jobs: Talk, negotiate, bargain, plead, threaten, bluster, pontificate, legislate and cast votes until they've figured out in a transparent and democratic fashion how to stabilize our public debt at a sustainable ratio, setting spending, taxing and borrowing at levels that we can live with.

And then face the voters on Election Day.

Repeat as needed.

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Rex Nutting is a columnist and MarketWatch's international commentary editor, based in Washington.

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Instead of borrowing the money, we could use seigniorage to create it.

It's a brilliant and creative idea in theory, but in practice it would be almost as devastating to the full faith and credit of the United States as a default would be.

And then face the voters on Election Day.

Repeat as needed.

Rex Nutting is a columnist and MarketWatch's international commentary editor, based in Washington.

Debt-ceiling deal reachable, analysts say

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10 Crazy Things About The Debt Ceiling Crisis

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