The Debt Limit Charade

One of our readers recently asked us, “What about debt limits? Why are you not writing about debt limits?”

Seems pretty reasonable given our fundamental formula: Deficits = Debt = Destruction. So where is TheFundamentals on this issue of debt limits and the need of the US increasing its total borrowing beyond the current "limit" of $14.3 trillion? By the way, this $14.3 limit was just set in February 2010 when it was increased by almost 2 trillion dollars. Two trillion gone in less than one year. Mind boggling isn’t it?

Let’s start by understanding why the congress must pass a law establishing just how much the United States can owe? Why is that? It’s not in the constitution, is it? We can’t find it. We have written at length about the powers of congress to pay debts and to borrow. So why must congress set the debt limit or else the treasury cannot issue the debt?

Here’s why ---

For many years, from the beginning of the new republic up to 1917, congress would approve each new bond issue coming out of the treasury department. This goes back to the constitution which authorized congress to borrow on behalf of the United States. But that same authority, as we have previously pointed out, congress is also authorized to repay debts. Funny how they seem to grasp one concept and ignore the other, huh? If the government needed $100 million a bond issue would be authorized by congress and then sold to buyers. Congress passed the second liberty bond act of 1917 and set a debt limit. Today it’s known as 31 USC 3101.

Read more: http://vlex.com/vid/sec-public-debt-limit-19220756#ixzz1AXiTbAbj

Ever since then, as congress borrows more and the debt goes up, up, up they go through this charade of raising the limit. Congress may be the only big time borrower in the history of the universe that sets its own debt limit. Who else do you know who gets to set the amount they can borrow?

Let’s consider debt limits in a more absolute sense. Like you and me; the neighborhood store; the car dealer; the steel mill; the manufacturer of refrigerators and the folk who grow corn, cattle and those who mine copper and iron ore. By the way, if you don’t recognize this quick list of activities, let us help remind you what/who they are. They are wealth creators engaging in wealth creating activities. They are the foundation, the very life blood of economic activity; economic growth and, therefore, job growth. Did you notice, no government activities listed? None. You will never read here that government creates wealth or economic growth or jobs. Why? Because they don’t. You do not read here that discrimination laws, or medical liability litigation or environmental protection or union promoting activities or lots of special deals for public employees are creating jobs and economic growth. None of these government activities create any wealth; they consume it. They do not create jobs; and, no, they do not add to the competitiveness of a country. Nope. All they do is subtract from it if they are not limited; not contained; not controlled very carefully by the powers of the states; by the powers of the people. When they are not contained you will find debt rising and you find the debt limits raised consistently by the politicians and their bureaucrat friends. If you doubt this statement of fact, just read about the state of the state of Illinois. Here is as good as any article to display what happens when the fox oversees the chicken house: http://online.wsj.com/article/SB10001424052748704415104576066233181194412.html?mod=WSJ_Opinion_LEFTTopOpinion

Back to debt limits. Each of the examples of wealth creators specified above have debt limits. We all know about debt limits. All we have to do is look at our credit card statement and it will tell us exactly the limit on how much we can spend and owe on that credit card. We also know debt limits because we know how much someone will loan us to buy a house if we own a house. If we own a business, be it big or small, and we need to borrow from a bank or other lender we know how much they will lend us and what collateral they will demand in return. We know the exact amounts because we have to live under those conditions. We are obligated to perform under those conditions or we will be deemed to be in default and then a series of processes, legal and otherwise, will occur to make certain that we do perform or face the consequences. This is a long established tradition of credit/lending practices, debt limits and performance obligations that are the fundamentals of a good economic system. A system with rules and a system that provides benefits and consequences.

And the debt limits that are proscribed are not determined by the borrower; they are set by the lender; the creditor. They are based on a series of objective and subjective measurements that are all designed to determine the ability of the borrower to repay so that the lender will get their money back and all interest and other fees due them under the lending contract. This is the way in which real debt limits are set. They are set by the lender and the borrower must accept them or negotiate them. And that is why TheFundamentals is not very interested in the debt limits set by the US congress and signed by the US president. They are not debt limits at all. They are a political game manufactured in Washington DC by 536 people plus 2. The house of 435; the senate of 100; the president of 1 totaling 536. The other two – fed chairman Bernanke and treasury secretary Geithner.

Remember when the founders set about telling George III to take a hike, they sought the ability based on God given rights to set their own course and not be subject to the arbitrary power of others. Freedom and responsibility were their fundamentals. They did not see the need to capture and commemorate each aspect of responsibility in their words and in the documents they prepared. They did set up limited government powers and checks and balances because they knew and they had experienced the corrupting and abusive power applied by unfettered governmental figures. They never would have had occasion to even contemplate a government that would abuse the public treasury as is currently being experienced. They were not cut from the cloth of the current political leadership that values their own comfort and their own wealth and their own jobs over the good of the republic. If you doubt our analysis above, reread the closing words of the declaration of independence. You should know them by heart by now. They are among the finest words ever written by people of purpose: “And for the support of this Declaration, with a firm reliance on the protection of Divine Providence, we mutually pledge to each other our Lives, our Fortunes, and our sacred Honor.

The periodic charade of raising self imposed debt limits in an act of arrogance perpetrated by 536 plus 2 undisciplined and financially promiscuous individuals who need to read the Declaration of Independence and pray for even a small amount of the courage needed to right their course. They are engaged in the pure and simple financial destruction of a country. Do not, under any circumstances, support either their spending activities or their debt limit setting nonsense.