Debt, monetizing debt, lying about debt

The Senate voted to lift the debt limit by $781 billion last Thursday. Total debt is up to nearly $9 trillion. The Bush deficits keep adding to the pile. As big as they are, they are still being understated. Official numbers on the deficit depend on a continuing back door into Social Security Funds.

It's not that I mind filling Social Security Retirement and other funds with federal bonds. What I mind is the bankrupting of the operating budget by incompetence and lying and then concealing the extent of the crime. The level of borrowing is an important measure of solvency. A bond is a debt instrument. Claiming we're not borrowing when we are is a fraud.

I also mind the hoopla of a couple of Republican Senators objecting to this casino financing in the name of fiscal responsibility. This is strictly a show for the benefit of the folks back home. Big debt and Republicans go together (see chart).

The great preponderance of debt, as you can see, has been incurred during the stewardship of Republican presidents.

This is business as usual for them. Much like John Ashcroft showing up behind the desk of his own K street lobbying firm is business as usual.

A NYT story says that in an hour long interview, "Mr. Ashcroft used the word ‘integrity' scores of times." )

Integrity for Ashcroft is similar to fiscal responsibility for Republicans as a party, just labels on marketing props, not actual codes of conduct. The amount we owe has now ballooned to such an extent that, along with the impending expansion of Social Security and Medicare and the unwillingness of the GOP to face facts, the continued solvency of the federal government has come into question.

Will we be able to raise taxes to the level needed to pay off these debts and meet our entitlement obligations at the same time? Particularly when the party putting on the show is the hate-taxes party? Some financial advisors and economic observers have begun talking openly about "monetizing the debt."

"Monetizing the debt" is lingo for using the printing press to pay off bonds. It's an act of desperation. Obviously it is not expected by investors, because US government bonds are still trading at a high price. But they should worry. The security and liquidity of government bonds, which is why they are trading at such a price, is not guaranteed.

Most folks worry about inflation, which is inevitable with monetizing debt. I worry about default, or a "change in terms," where bonds are not paid as promised, but on an "adjusted schedule." After all, the printing presses are in control of the bankers, the Federal Reserve being the central bank. Bankers hate inflation. Screws up their interest rate calculations. Or it could be a combination.

Whatever happens won't be pretty. These are financial stresses never before seen, and the fallout will be both domestic and international.

But what else do we do? We are incurring debt at a sickening rate. Pretty soon money is going to cost more. Rising interest rates will mean a slowing domestic economy and higher debt service for the government.

In ten or fifteen years (no, not tomorrow), or when the cracks become apparent, we're into the deep doo-doo. In the Clinton era, Rubinomics combined with very low energy prices gave us the break we needed. Unfortunately, we didn't take advantage of it.

# Posted by Alan : 9:48 PM