Ultimately, if something drastic is not done, borrowing costs will soar, and just rolling over the debt will become impossible without extraordinary measures. The problem is we’re already there, with the Federal Reserve intervening to take up the slack in the treasuries market with its most recent $600 billion intervention.
Coupled with current proposals, it is clear that Washington has no intention of reining in spending. Instead, the powers that be intend to simply print money to pay off the debt, Fed Chairman Ben Bernanke’s denial that he is printing money notwithstanding.
“What we’re doing is lowering interest rates, by buying Treasury securities,” Bernanke said on CBS’ 60 Minutes. With what? you may ask. Good question. In November, New York Fed President Bill Dudley clarified with what: “What we’re doing is, when we buy Treasury securities, we are increasing the amount of reserves in the banking system.”
That means the Fed is creating money, pure and simple. This is not the same as the Fed’s program to sell mortgage-backed securities and use the money to buy treasuries. Those operations continue to date. No, the new $600 billion purchase of U.S. debt is with assets that previously did not exist. That is monetary expansion.
This is where the Fed draws a fine line. Dudley continued, “For those reserves to actually create money, the banks actually have to lend those reserves out.” Uh-huh.
So, Bernanke maintains that he simply bolstering bank reserves and lowering interest rates, but not with printed money, but with — imaginary money, we suppose. Of course, rates on ten-year treasuries have actuallygone up to about 3 percent since the Fed announced its move in early November.
And the last we checked, when treasuries are purchased, that money goes to refinancing the debt and financing real government spending.
Either way, a new $600 billion is a new $600 billion. One minute the money wasn’t there, and the next it was. Either it’s a new $600 billion to pay off U.S. creditors, or it’s a new $600 billion to lend to the government to finance the approximate $3.6 trillion budget.
Either way, it’s new money to paper over the debt, and now something must be done by Congress to prevent it from every happening again.
The fact is, the 112th session of Congress will have to go much further than the deficit commission if the fiscal house is to ever be brought into order.
The Obama deficit commission did not contemplate a balanced budget until 2035, nor did it contemplate ever reducing overall spending. That means, under the proposal, spending would still have increased year-on-end. Therefore, it never contemplated reducing the overall $13.8 trillion debt, which would have continued to grow under the proposal. That is unacceptable to the American people, who want to pay down and retire the national debt, not continue to grow it.
We don’t have 25 years to balance the budget. We have to do it now.
The commission failed in another key respect here, where it contemplated on average about 3.5 percent economic growth every year for the next ten years. The problem here was that was significantly higher than what the Congressional Budget Office projected last year when the economic outlook was more positive than it is now. If one uses CBO’s baseline, just by lowering the economic outlook slightly, revenues under the commission proposal would be about $559 billion less than stated. That’s unacceptable. The future solvency of the nation must not depend on rosy economic outlooks.
In any event, we cannot grow ourselves out of this mess alone, although robust economic growth must be restored through permanent tax relief. We cannot tax our way out either, although revenues would begin to recover with robust economic growth. These steps, although necessary, are not enough.
The only way to stop this death spiral of debt any time in the near future is to cut spending immediately. Any balanced budget plan that does not contemplate severe spending cuts is delusional and will not work. Even the IMF gets it. It’s time for Washington to get with the program.
William Wilson is the President of Americans for Limited Government. He has spent his career working in political strategy and public affairs for various causes and organizations.