Debt Ceiling Worries Are Overblown
NEW YORK (TheStreet) -- The debt ceiling debate seems to have returned from the dead. But as our boss Ken Fisher has said, what many folks miss is that the debt ceiling is a purely political (and arbitrary) machination. And it's one that members of Congress aren't terribly motivated to fix, so it's unlikely to kick the bucket anytime soon.
For context, Congress used to have to approve debt issuance, but during World War I, lawmakers feared such a mundane task might slow potential war funding. Hence, they created the debt ceiling in 1917 to (try to) take themselves out of the picture.
Noble enough! But the limit was arbitrary and didn't account for debt's tendency to grow in sympathy with the broader economy. Hence, over time and as the country grew, our debt rose as well, butting up against Congress's arbitrary ceiling.
Congress mostly rubber-stamped debt ceiling increases until the mid-1950s, when lawmakers began using the debt ceiling as a political tool to leverage concessions from a president and/or the opposing party by threatening a government shutdown and a potential debt default.
This political gamesmanship has occurred over and over. Often the deliberations go down to the wire (or even a bit beyond) before a new ceiling is established. In fact, the debt ceiling has been lifted 91 times in the last 40 years. No politician wants to be tainted with causing the U.S. to default. Yet, at the same time, neither party wants to give up this potential battering ram. Hence, we likely will continue to have debt ceilings, debt ceiling debates and half-hearted "solutions" for "solving" the debt ceiling dilemma.
One such solution we've heard in recent years is minting a $1 trillion platinum coin, as explained in a post at AEIdeas, the public policy blog of the American Enterprise Institute.
At CNN, Jack M. Balkin wrote, "some commentators have suggested that the Treasury create two $1 trillion coins, deposit them in its account in the Federal Reserve and write checks on the proceeds."
That is ... one ... (theoretical) option. Yet we'd hasten to add it's entirely unnecessary and likely comes with unintended costs of its own. There is, after all, no such thing as a free lunch.
But beyond that, this theoretical $1 trillion platinum coin (and why must we use platinum, by the way?) is merely another arbitrary measure on top of the already arbitrary debt ceiling -- a Band-Aid on top of a Band-Aid.
Imagine for a moment that the Treasury does authorize creating and stashing a $1 trillion coin at the Fed. Failing a congressional debt ceiling lift, the government would issue new checks against the coin ad nausem until ... it reached the $1 trillion limit. But then perhaps Treasury would add another $1 trillion coin, and so forth and so on.
This merely would create a temporary bypass to the debt ceiling that likely would need to be revisited as the economy continues growing (as it always has, in fits and starts). Make no mistake: We're not fans of ever-increasing relative debt (mostly because we prefer smaller government relative to the private sector). But the absolute amount of debt pretty much has always grown and likely will continue to do so. (The government never repaid all the WW II-related borrowings after the war ended, yet a slower debt growth rate combined with economic growth reduced the size of debt relative to GDP).
We just think a debt ceiling serves little purpose outside of creating a periodic opportunity for political posturing. And remember, since 1921, Congress has been required to develop and pass a budget that ultimately determines what the nation spends in a given fiscal year. The Treasury merely issues debt to cover differences between government expenses and revenue.
Our bet is pols fold like they have 11 times in the last decade and find compromises to raise the debt ceiling again. But we'd be remiss if we didn't address the economic consequences if the government doesn't lift the ceiling before borrowings hit the $16.4 trillion debt ceiling as projected in February 2013. Those consequences, at least in the near term, aren't catastrophic.
The government need only delay some nonessential spending or shut down some services, such as national parks or passport issuance. At only 1.4% of GDP (as of 2011), debt service costs are tiny and likely easily paid by revenues (only 9.9% of total tax revenue in 2011, according to the White House Office of Management and Budget.) So the likelihood of default is also exceedingly low. And of course, it's probably also likely that the government finds some extra cash in the sofa cushions or a $20 bill in the laundry, buying further time for Congress to find resolution.
The debt ceiling is so arbitrary and so lacking in real, economic impact that you just don't need to spend the time conjuring schemes like trillion-dollar coins, Fed vaults and check writing. Given time, politicians are highly likely to do what they've nearly always done: Politick to the last moment, then raise the debt ceiling.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
This article constitutes the views, opinions, analyses and commentary of Fisher Investments as of December 2012 and should not be regarded as personal investment advice. No assurances are made Fisher Investments will continue to hold these views, which may change at any time without notice. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.