Debt Limit Reached, Now What?

The debt limit has been reached, and as far as I can tell, the global economy is still functioning. Could it possibly be that talks of an instant shut-down of our government was plain old hyperbole from our politicians? Luckily for us, “bookkeeping maneuvers” by our government will prevent a deft default and potential Armageddon- at least for the next 11 weeks. 

The way I see it, the government is overestimating the short-term ramifications of failing to raise our debt limit and underestimating the long-term ramifications of ignoring structural reforms in spending. Our creditors know we will eventually raise the debt ceiling. They also know the Fed is prepared to buy up all newly issued Treasuries if it came down to it. Raising the debt ceiling won’t do much without reforms in spending, but our leaders don’t care.  They want to keep this circus alive so Americans believe they are actually doing something to solve this debt crisis.

I can see it now: Republicans and Democrats will go back and forth “negotiating” until they finally reach a bipartisan agreement with no real cuts in spending. They will then go on a non-stop media tour boasting about how they prevented another Great Depression. Meanwhile, Social Security and Medicare will remain the two elephants in the room. It should be painfully obvious by now: our government will not make the necessary spending cuts until a major crisis hits. We are following the failed pattern of nations past whose politicians put their self-interest above the interests of the country.

Our government thinks a bond crisis would arise if the debt ceiling isn’t raised. This is complete nonsense. If our government actually reformed their spending, it would do wonders for the bond market regardless of what we do with the debt ceiling. If I held long-term government bonds, I would trade a temporary suspension in payments for a long-term plan that ensured I would be receiving interest 10 years from now. As it currently stands, the big money only wants to hold short-term paper. I wonder why. This is a dangerous game we’re playing where the Fed is buying up over half the supply of government paper.

Raising the debt ceiling over and over again is the problem, not the solution. It is also 100% assured that our government will raise taxes into a downturn like true economic neophytes. Just ask Greece how that plan is working for them. There are major reforms we need to implement that just aren’t on the radar of our politicians. Our leaders can’t even spell economics, so it’s wishful thinking to assume they will come up with creative solutions to this crisis. I’ve always felt the global sovereign debt crisis would hit the U.S. last since we have the deepest credit markets and the world’s reserve currency. Now that the European crisis is reappearing like I said it would, everyone should understand that the U.S. crisis is not far behind.

Debt Limit Reached, Now What? is a post from: Expected Returns

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