Copyright 2013 John T. Reed
The top headline on today’s (5/10/13) Wall Street Journal is “Falling Deficit Alters Debate.”
When journalists get themselves into trouble, it is often because of headlines. This is an example of that. The article itself is more accurate.
First, I have already reported to my readers several times that the deficit has fallen every year since Obama took office. He would like to take some credit for it but obviously it has happened in spite of him and because of the Republican House. Here are the figures adjusted for inflation from http://www.davemanuel.com/history-of-deficits-and-surpluses-in-the-united-states.php:
|Year||Deficit in inflation-adjusted dollars|
So did it go down? Yes.
The 2009 deficit was the all-time record. The previous record, adjusted for inflation, was $0.73T in 1943 during World War II. Indeed, 2009 was more than TWICE the prior world record!
The drops were insignificant in 2010, 2011, and 2012. The only significant one is the one affected by the sequester.
Finally, as the Journal story reminds readers in the text,
[the national debt is still] rising because the government still spends more money than it brings in.
In other words, a falling deficit is not a good thing. It is less of a bad thing.
Are you still beating your wife? Yes, but not as much.
And the key number is not the debt, but the debt-to-GDP ratio.
Has that fallen? Actually it has. I was recently stating it as 108% (from the national debt clock). At the moment, that ratio on that clock, which is racing like a high-speed odometer, reads 107.149%.
Is that a significant drop? No. It is still way too high.
Are we at least headed in the right direction? No. We’re not headed anywhere. It’s flat.
It that better than going up 8% per year as we were initially under Obama?
Absolutely. But we are still vulnerable to a shock that would kill trust in the U.S. dollar (USD). We have, for the moment, however, stopped putting straws, or anvils, on the camel’s back.
Is it all downhill from here? Hardly. Read the body of the Journal article. Part of the drop is money coming out of FNMA and FHLMC profits. But those stem from housing values going up which stems too much from the Fed artificially holding down interest rates at record low levels. When rates go back to normal, the value of all capital assets, including houses, will fall.
Also, tax revenues have gone up 16% over last year, because of the fiscal cliff increase and economic growth.
But—as the article points out, the Baby Boomers just started drawing social security and Medicare. I am on the leading edge of the Baby Boom. I started getting social security last summer. I did not sign up for Medicare when I was eligible at age 65, but signing up for social security automatically put me in Medicare Plan A. And there are 78 million more Baby Boomers behind me. Merely lowering the deficit by 20% ain’t gonna pay for medical care for close to a 100 million new Medicare, Obamacare, and Medicaid recipients, or for all the new food stamp recipients the Democrats are recruiting.
The main point of the Journal article is that the debt-ceiling vote has been postponed by the lesser deficit spending from May until maybe the end of the summer, taking pressure off the Congress and White House. That’s a bad thing because the pressure is what has enabled what little progress has been made. If all Congress thinks needs to happen is to postpone debt ceiling votes, we are not going to get out of this mess with any soft landing. The basic problem is the public does not think there is a problem. Milestones like the debt ceiling votes are about the only way to change their minds.
There was a very chilling part in the Journal article though. Whenever the debt ceiling approaches, Democrats says the Republicans have to vote for it to save the “full faith and credit” of the U.S. Actually, the “full faith and credit” of the U.S. is doomed, because they keep raising the debt ceiling. But there is not at present any “full faith and credit” danger. Although the government does not collect enough in taxes to pay all its promises, it does collect enough to pay all the bond interest and it can refinance maturing bonds without raising the debt ceiling.
Pursuant to that fact, the House passed a bill on strict partisan lines that orders the president to pay bond interest first then social security recipients in the event the ceiling is not raised. That eliminates the “full faith and credit” argument.
And how did Democrats respond? They derided that bill as the “Pay China First Act.”
China is the largest holder of U.S. bonds. The Constitution requires that America pay its bondholders first. Section 4 of the Fourteenth Amendment says,
The validity of the public debt of the United States, authorized by law, including debts incurred for the payments of pension and bounties for services in suppressing insurrection or rebellion shall not be questioned.
Democrats are essentially calling that the “Pay China First” clause of the Constitution. Uh, when China is the U.S. government’s biggest bond holder, pay China first is exactly what that clause requires. (Democrats have lately begun arguing that the 14th Amendment debt clause means that the very idea of a debt ceiling is itself unconstitutional. Even Obama has said that his lawyers tell him that is a “losing argument.”)
That derisive name—“Pay China First Act”—is racist, xenophobic, and displays an immoral disregard for the need to keep promises. It is an argument for not caring about the “full faith and credit” of the U.S. To the Democrats, “full faith and credit” means to keep buying Democrat votes with food stamps and Medicare and Obama phones, and if there’s not enough to go around to everyone who has been promised money by the federal government, the first thing to be sacrificed is the actual “full faith and credit,” namely the trust of the world bond market that U.S. bonds will be paid in full as agreed.
And what do you suppose the Chinese think about the Democrat party—which controls the White House and Senate—sneering at the idea of firing bureaucrats or cutting entitelments to keep our bond promises to China? China could, and now may, dump all their U.S. bonds. That is precisely the kind of shock that could start a worldwide run on the dollar and thereby tip the U.S. over into hyperinflation.
U.S. President Eisenhower ended the Suez Canal crisis—an invasion by Britain and Israel of Egypt to seize the canal after Egypt nationalized it. Eisenhower told Britain and Israel to withdraw. They refused. Eisenhower then threatened to sell British federal government bonds, which would destroy the value of the British pound. Because the U.S. was the China of 1956 (world’s largest creditor nation), Britain was forced to withdraw.
Now China is the China of 2013. They could, and may, threaten to sell all their U.S. bonds. And we are in the position Britain was in—powerless for currency reasons to disobey the orders of our largest creditor.
Calling a bill to make sure the U.S. pays its bondholders and social security recipients first, when there is not enough money to cover all federal expenses, the “Pay China First Act,” is precisely the sort of behavior that might cause China to do to the U.S. what the U.S. threatened to do to its close ally Britain in 1956. Indeed, the Suez crisis had nothing to do with Britain threatening not to pay the U.S. bond owners. The moron Democrats who said this are practically daring China to pull an Eisenhower on us.
The day we pass a law that directs the Treasury NOT to pay China first may very likely be the Day the Dollar Dies.
John T. Reed