Debt ceiling drama was nothing but maskirovka
GEORGE NOGA – JUN 4, 2023
The debt limit negotiations were all sound and fury signifying nothing. The ending of this melodrama was known for a long time. The media, with hyperbole and hysteria, breathlessly flogged a possible default to sluice up their ratings; but there never was any real risk of default. The worst that could have happened was a brief technical default on interest payments – and even that was extremely farfetched.
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There never would be default on any principal for the obvious reason that new debt could be issued in the same amount as the maturing debt without exceeding the debt limit. Insofar as interest is concerned, the federal fisc has over $400B coming in each month whereas interest on the debt usually is around $65B. The US could pay interest on the debt and still have $335B left over. The Treasury also could pay Social Security of $1 trillion per month and have $235B remaining for other expenses.
The ending was precisely as I wrote in my April 23, 2023 post entitled “Debt Limit Kabuki”. It is available on my website: www.mllg.us and on Substack.
“In the end, everyone gets what they want. The debt ceiling is suspended and phony spending cuts are touted. Americans are beguiled into believing we are on a sounder fiscal trajectory. Everyone claims victory and government goes back to business as usual.”
The so-called spending cuts are nothing but smoke, mirrors and prestidigitation. Of the claimed $2 trillion in cuts over 10 years, none are real. Real cuts in current spending are strictly symbolic; they are infinitesimal and inconsequential. All the phantom cuts are based on future arbitrary spending baselines. Moreover, the ersatz cuts apply only to discretionary non-defense spending (DNDS), which is less than 14% of federal spending; the other 86% continues to increase at a high rate.
Trajectory of the deficit is unchanged
Federal spending next FY will increase $500B or 8% even if DNDS is frozen. That’s because entitlements and mandatory spending will increase at least 5% and interest on the debt will skyrocket by $300B or 60% to over $800B. The deficit will remain at $1.5T and likely will increase to $2.0T – and that assumes no recession. This means the deficit will increase y $3T to $4T over the next two years subject to the so-called spending cuts. Some cuts! Freezing the DNDS reduces the putative FY23 deficit only from what was projected – and that is not a real cut, but legerdemain.
As noted, interest on the debt increases $300B next year alone due to sharply higher interest rates and the issuance of new debt at current interest rates to replace maturing debt carrying much lower interest rates. There is $6 trillion of treasury debt maturing soon and it will cost $200B more in annual interest to replace. The other $100B comes from new debt. Because there is $31T of total debt, this same calculus of $200B increases in interest costs will repeat each of the next few years. Within one year, interest on the debt will exceed spending on defense, medicare and DNDS – i.e. running the government. Soon interest alone will top $1T per year.
The skunk at the garden party
About the only favorable thing that can be said about the debt ceiling deal is that it is (barely) better than nothing. Anyone who looks at the numbers in this post will see there is no escape. The only way to change the trajectory of the deficits is to make immediate, large and real spending cuts and to sustain them for a decade or more.
As is apparent from the debt limit kabuki, that is politically impossible – actually, it’s worse than impossible; it’s politically radioactive. The necessary cuts will be made only in the midst of an economic meltdown when Americans are in such a panic they will go along with anything that offers them a glimmer of hope.
Simply to freeze the debt ratio at its present level of around 100% would require an immediate cut of $900B, or over 20% per year across the board – including Social Security, Medicare, Medicaid and mandatory spending (pensions). And that does not solve the problem; it just keeps it from getting worse.
At the risk of being the skunk at the garden party, the debt ceiling deal is cause for dread – not congratulations. America has passed the point of no return and the beginning of the Great Debt Crisis is only a matter of time. It is Checkmate!
© 2023 George Noga
More Liberty – Less Government, Post Office Box 916381
Longwood, FL 32791-6381, Email: mllg@cfl.rr.com