Looking into the Economic Abyss
The U.S., up against the debt ceiling


Conrad Black

It has never been believable to me, and still is not, that the United States would hit its debt ceiling and suddenly be without any ability to borrow or to pay the running costs of the U.S. government beyond incoming cash. In that scenario, it could pay its bills without borrowing to do so, effectively spinning the presses, though in fact checks would continue to be issued and would effectively increase the money supply and inflate the currency, a model often followed in Africa and Latin America, and even in Germany in the early Twenties. The second possibility is that the U.S government, like that of New Zealand nearly 30 years ago when it couldn’t sell its bonds, could arbitrarily cease almost 40 percent of its spending functions, an immense percentage of non-contractual costs. This would involve laying off large numbers of civil servants, cutting the pay of the surviving federal employees, demobilizing a large chunk of the immense American armed forces, and virtually eliminating most of what was left of discretionary spending. The government in Washington would become almost a municipality, distributing contractual benefits to pensioners, Medicare and Medicaid recipients (the elderly and the poor), and running a military reduced to pre–World War II levels.

Utterly irresponsible though both parties have been, contemptible though this chicken game as the country hastened toward the debt ceiling has been, even at this late date, I don’t think the direst fates were ever in prospect. In fact, it is not so far from where New Zealand was when it could not sell its bonds: Seventy percent of American treasuries, when issued, are bought by the Federal Reserve, and paid for with a computer click of Federal Reserve notes. This prolongs the questionable notion that the debt will be repaid when the government’s accounts come back into balance and surpluses are applied to debt reduction, as happened after America’s major wars (the Revolutionary, Civil, and World Wars). Despite purposeful noises, there is still no evidence that the U.S. has the will to pay down the debt rather than just devalue the currency in which it is denominated. And unless the debt really is repaid, the immense deficits of the last several years are, in their consequences, just additions to the money supply.

Officially, this is not happening, an economic recovery is underway, and inflation is very moderate. But the U.S. dollar is now worth less than one 1600th of an ounce of gold (70 years ago it bought one 35th of an ounce of gold), and — as Rep. Ron Paul pointed out two weeks ago when Federal Reserve chairman Ben Bernanke appeared at his House monetary-policy subcommittee — the real rate of inflation measured against a more representative yardstick of popular needs and tastes than the one the Treasury uses is 34 percent in three years. Looked at from the perspective of what is actually happening, the change wrought in refusing to lift the debt ceiling would be to throw down the mask of inflation and money-supply increase, not in itself an unwholesome recourse to official candor, but also to create hysteria in the bourgeois world of finance, with editorialists and stock-jobbers alike circling at speed like demented waterbugs.

It is not clear what has been on offer in the negotiations led by President Obama and House Speaker Boehner, aiming at a $4 trillion reduction in deficit spending over the next ten years (only about a 40 percent reduction, unless there is a dramatic return to economic growth), and reportorial and commentariat interpretations tend to follow quite closely the political leanings of the writer. The mechanism of deliverance appears to have been discovered by Senate minority leader Mitch McConnell of Kentucky, and to consist of giving the president the authority to raise the debt ceiling, without the Republicans’ specifically having to vote for it (a specious distinction without a difference); raising some taxes by eliminating exemptions, again avoiding the Republican bogey of a tax increase, while some are lowered and many are simplified. (The tax increases are chiefly on those whom the president has already taken aim at as candidate donors in wealth redistribution: the so-called rich who earn over $250,000 a year, which for a family in most large U.S. cities, with three children in unsubsidized education, leaves no disposable income after rent, food, and minimal fuel, including gasoline.)