While the debate surrounding the debt ceiling makes for good drama and gives politicians lots of face time on the cable new channels, the debt ceiling was never designed to reign in government spending.
With the exception of Denmark, the U.S. is the only democratic country in the world with a statutory debt limit. Since its inception with the Second Liberty Bond Act of 1917, Congress has voted to raise the debt ceiling 102 times. Both parties have been at fault. The debt ceiling was raised 18 times during the Reagan administration, the most of any one president.
The purpose of the debt ceiling, which we’re on track to hit on October 17th, was to give the Treasury more “flexibility” to borrow during World War 1. Before 1917, it was up to Congress to authorize the Treasury to issue debt instruments. The debt ceiling transferred much of this authority to the Treasury itself, thus allowing the Treasury “greater ability to respond to changing conditions and more flexibility in financial management.”
In other words, it became easier for the government to assume more debt because Congress no longer considered the virtues or detriments of issuing debt for individual programs, only the aggregate debt of all government programs.
The result? Our current national debt of $17 trillion.
But the real elephant in the room is the federal government’s unfunded liabilities: Social Security, Medicare and government trust funds. Depending on whose estimates you use, these liabilities range from $75 trillion to close to $200 trillion.
If you were to apply Generally Accepted Accounting Principles (GAAP) — the same standards that the federal government forces private organizations to use — to the federal budget, you would find that the yearly federal deficit is multiples higher than reported.
By using its own accounting standards, as well as other gimmicks, the federal government has hidden its actual fiscal situation, which is much worse than even the massive on-the-books debt indicates.
While folks often worry about how we are going to pay back the national debt, the fact is it’s not meant to be paid off. The only thing that the Treasury cares about is servicing the debt, or making the interest payments as it accumulates more.
While the left may say that the debt doesn’t matter because the government can never technically go bankrupt, this every increasing debt does have dire consequences. As the debt load becomes greater, fewer entities are willing to buy it, forcing the central bank to buy more by creating money out of thin air. Eventually, we will reach a point where the Fed is the only one buying debt. Monetization of this kind is wildly inflationary and could cause a currency crisis.