People and institutions still lend money for 90 days to the U.S. government in order to earn a tenth of one percent per year interest.
They trust the government. Yet the fiscal cliff charade goes on. The U.S. government cannot pay its bills without borrowing more money. The whole world knows this. But the “smart money” lines up to lend.
Peter Schiff writes:
It is impossible to “pay” one’s bills by borrowing more. Taking out new loans to retire existing debt may replace old creditors with newer, larger, creditors, but it can never be described as a real pay down. It’s like paying off your Visa card with a Master Card. Paying one’s bills requires that outstanding debt be diminished. In direct opposition to Carney’s and Geithner’s statements, the only way to force the government to actually pay its bills is to not raise the debt ceiling. But a fictitious debt limit is worse because it allows Congress to pretend that its atrocious budgeting decisions are not to blame.
Both Congress and the President readily admit that without an increase in the debt ceiling, the government will default on its obligations. This is tantamount to an admission that we lack the capacity or political will to actually repay what we have borrowed. Yet despite this, our creditors continue to loan us more money. As existing treasury bonds mature, we not only borrow the money necessary to redeem them, but we borrow it from the very people cashing them in. So it’s not really like paying our Visa bill with our MasterCard, it’s like paying our Visa with our Visa.
Why does the debt ceiling keep getting raised? Why is there a debt ceiling at all? Because of the Federal Reserve System.
The debt ceiling itself is both an ill-conceived compromise and a relic of past governmental integrity. For its first 128 years as a republic, the United States was able to function without a debt ceiling. This was possible for the simple reason that U.S. government had no central bank and could not borrow beyond its ability to repay through taxation. And since the ability to tax is always limited by taxpayers’ assets (and their extreme hostility to those who want to take them), legal gimmicks were not needed to prevent Congress from spending too freely. But the creation of the Federal Reserve in 1913 gave the Federal Government a potential means to borrow indefinitely by having the new bank buy its debt. Sensing this danger, the original Federal Reserve Act of 1913 prohibited the Fed from buying or holding government debt.
But just four years later the United States needed a means to raise money quickly to pay for its efforts in the First World War. The government passed an amendment to the charter to allow the Fed to purchase Treasury Bonds. Fearing (correctly) that this would create a mechanism for perpetual debt expansion, conservative lawmakers insisted that the amendment include a “debt ceiling” provision that would cap the amount that the government could borrow.
Close, but no cigar, guys. This limit was “wholly meaningless, as it could be perpetually raised by future legislative action. This is exactly what has happened. The debt ceiling has been raised, with varying degrees of fanfare, every time it has been hit. This renders the law completely meaningless.”
I do not think it’s meaningless. It is an ongoing public admission that the U.S. government will default. It is nice to be reminded of this at least once a year.
The suckers pay no attention. They will in the Great Default.