Exchequer

The One True Debt Ceiling

Tim Geithner says there’s no “creative financial solution” to the debt-ceiling problem, but don’t believe him. Gimmicks are what these guys do: With the government having spent most of the Obama years “selling” most new Treasury bonds to the Fed — in effect, with the government selling bonds to the government — while the Fed is still holding trillions of dollars worth of “assets” that are more like liabilities (nearly $1 trillion in mortgage-backed securities, a bunch of Fannie and Freddie garbage, etc.), and while some $100 trillion in entitlement liabilities are being magicked away through the wizardry of government accounting, these guys make Enron look like the financial citizen of the month. It’s not hard to imagine all sorts of “creative financial solutions” to keep these plates spinning for another election cycle or two.

But the debt-ceiling debate in Congress is not about the real issue. As the oracle says, “The debt ceiling that can be lifted by Congress is not the One True Debt Ceiling.”

I have a feeling that we’re going to look back on this debt-ceiling “crisis” as the good ol’ days within a year or two, and maybe sooner. When the bipartisan negotiators started thinking big, they talked about cutting $4 trillion off of new deficit spending over the next ten years, or just a tad more than the national debt has increased since Pres. Barack Obama was sworn in. That $4 trillion over ten years isn’t exactly chump change, but it’s not a game-changer, either. If that’s the best we can do, our best probably is not going to be good enough.

The debt ceiling we’re talking about right now is statutory. There’s a law that says the government can only borrow so much. But, as I have argued before, there’s another debt ceiling — the real debt ceiling, the One True Debt Ceiling, the one that you cannot raise with a vote in Congress. There are signs that we’re getting ready to bump up against it.

The Mister Magoos at Standard & Poor, Fitch, and Moody’s are making worried noises. More important, the market is not so eager to buy U.S. Treasury debt as it was a few months ago. This may be a temporary condition, or it may speak to the fact that the world’s lenders no longer believe the financial story being told by the world’s biggest borrower. Even though the Fed plans to continue acting as the world’s largest buyer of U.S. Treasuries (even after QE2 ends, by reinvesting its returns), the market for Washington’s debt is contracting. Bidders aggressively drove up yields in the last bond auction, and the government will be pushing another $32 billion out the door on Tuesday. How the market will react is anybody’s guess.

The government’s cost of borrowing is right now remarkably low. If the interest paid on Treasuries should return to its historical average, then the cost of debt service would soon run into hundreds of billions of dollars more each year, adding about $5 trillion to our financial obligations by 2020. And that’s just interest: We haven’t paid down a dime of of the national debt since 1961.

Keep all that in mind when Secretary Geithner points out that we have to roll over some $500 billion in Treasury debt in August alone. “Rolling over” debt means paying off old bonds and immediately issuing new ones, in effect transferring the government’s debts from one old bondholder to a new one. That only works if investors keep buying the bonds. Not enough new buyers, no rollover. And then you’ve discovered the real debt ceiling.

The Webster’s Legal Dictionary contains this definition: “an investment swindle in which early investors are paid with sums obtained from later ones.” It’s called a Ponzi scheme, and it keeps working and working and working, until it doesn’t.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through National Review Online here.

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