Inflation and the Debt Ceiling

CH, a faithful Stationary Waves reader, asks the following question:
If we don't raise it, we crash the US economy and several world wide economies, right?
Never one to shy away from a direct question, I will answer that question with the discussion below. In the interest of doing justice to both sides of the issue, I will refrain from the usual yes-or-no-plus-snide-remark that such discussions usually entail. Hold on to your hats, folks, it's going to be a verbose ride...

Part One: Restating the Question
The "debt ceiling" is an arbitrary number the United States Congress set for itself to ensure that the government would not engage in an unsustainable level of borrowing. Borrowing beyond this number (i.e. "raising the debt ceiling" to a new value) does not guarantee that the government will explode. Nor does staying within the boundaries of the debt ceiling guarantee that the government is solvent. It is nothing more than an arbitrary guideline.

You can think of it like what happens when you go out binge-drinking with your friends: In the back of your mind, you have some preconceived idea of what "too much to drink" is. Drinking beyond that level will not guarantee that you will be hospitalized with alcohol poisoning. Nor can you guarantee that drinking less is a "healthy amount of alcohol." It is mostly just your conscience speaking, and so it is with Congress and debt.

Therefore, CH's question isn't really whether the economy will collapse if we don't raise the debt ceiling. The real question is this: The US government is at risk of losing its credibility as a creditor and becoming completely insolvent - What will make us lose our credibility fastest: increasing the debt ceiling or defaulting on our debts?

Part Two: Increasing the Debt Ceiling
The most immediate threat associated with raising the debt ceiling is the signal it sends to lenders. By taking on debt in excess of our entire nation's ability to create a year's worth of wealth for more than 300 million human beings, we are effectively saying to lenders, "Give us money today, but it is unlikely that you will get your money back any time within the next decade."

Ask yourself, would you lend a large sum of money to anyone who gave you a clear signal that you wouldn't get your money back for many years to come? The answer is either "No" or "Yes, but only if I had money to burn and was allowed to charge a usurer's interest rate." Neither answer bodes particularly well for the US government.

But it doesn't stop there. When the government takes on debt, they simultaneously increase the money supply. This increase is called "inflation." Inflation hurts ordinary people.

You can think of it as though we are sharing a blueberry pie, just the two of us. You get half, and I get half. Then, two of my good friends show up and - because I am the government - I decide that they also get to have some pie. But rather than giving them some of my pie or baking a new pie to ensure you get the same sized piece you always had, I decide to carve your piece of pie into three pieces and give divide it equally among you and the newcomers. The result is this:
  1. The newcomers get more pie than they otherwise would have.
  2. You now have less pie than you used to.
  3. There are more of us than there are of you, and we can always out-vote you when it comes to future pies.
As you can see, when you understand the true nature of inflation, you note that it robs from people who already have money and pays out the resulting booty among special interests.

So to summarize thus far, raising the debt ceiling reduces our financial credibility as a borrower while simultaneously devaluing the money held by ordinary people. The only people who gain from this are special interests who manage to get paid by government spending and entitlement programs - at the risk of a total monetary collapse.

The stakes are pretty high.

Part Three: Defaulting on Our Debt
If hinting that we don't plan on paying our debts in the near future sends a bad signal to our lenders, you can imagine what kind of signal it would send if we were simply not to pay them back at all. Obviously, that would reduce our credibility as a borrower instantaneously.

On the other hand, we'd save ourselves from the evils of inflation. (Or, more accurately, we'd save ourselves from future inflation. Unfortunately, the inflation already incurred by existing government debt won't go away until we've paid that debt back.)

Part Four: Uh-Oh. Now What?
Defaulting on our debt causes certain doom; increasing the debt ceiling causes certain doom. We're not just caught between a rock and a hard place; we're pretty much screwed.

At this point, you might want to start listening to Ron Paul, Peter Schiff, Andrew Napoletano, and others, when they suggest that the United States is on the verge of a monetary collapse.

A monetary collapse occurs when people no longer have any faith in their fiat currency. They expect the future value of that currency to be much lower than the current value. As a result, the premium they charge for future payment (i.e. "originary interest") climbs higher and higher - right up to the point where no one can offer anyone else a sufficient amount of future money to convince anyone to lend, invest, or even to receive bi-weekly paychecks. Left without any means to secure future goods and services, people have no recourse but to purchase whatever they can today, right this minute, before the value of their cash-on-hand reduces even further.

Ludwig von Mises called this "the crack-up boom." He lived to see one in Germany. He'd know.

If we don't want to instigate a crack-up boom, then we want neither to increase the debt ceiling, nor to default on our debts. The good news is, that's entirely possible.

Part Five: The Solution
You don't have to read a five-part blog diatribe in order to understand how to fix this problem.

The US Federal Government is currently spending more than it can on wars, social programs, advertising, employee pensions, travel budgets, foreign aid, property management, and god-knows-what-else.

We can solve our debt problems by not spending this money anymore. Stop the wars. Stop the welfare. Stop the subsidies. Stop the advertising. Stop the legislating. Sell off the unused real estate and other assets. Cease foreign aid and foreign affairs meddling. Shrink or eliminate civil service pensions. Give Congress a pay cut. Trim the fat.

See how easy that is? Problem solved.

If that sounds funny to you, keep in mind that I am totally, completely, literally, entirely, 100% not kidding about this. It is my belief that unless the US government downsizes its operations, slashes budgets and payrolls, sells off assets, and eliminates funding, our country will have a monetary crisis.

So the next time you want to talk to me about the importance of the social safety net, you might want to ask yourself if you're prepared to ruin the country and your own savings account in order to try to make it happen.