THANKS TO TRUMP’S TAX CUTS, U.S. COULD DEFAULT ON DEBT IN WEEKS

…The US Constitution says we cannot default on our debts.

 

Congress should eliminate the debt ceiling once and for all.

 

We are now already starting to see the negative effects of the Trump tax cuts to our economy, and it’s very, very ugly.

 

Even though year after year, the US Congress has passed budgets that authorize spending that is well beyond the expected revenue.  They then have to raise the debt ceiling so that Treasury can borrow to make up for the shortfall.  Because of that approach, we now have more trillions of dollars of national debt.

 

Yes, thanks to the massive tax cuts passed by US Congress in December, the so called dooms-day clock just sped up.  Unless the US Congress gets its act together, the federal government will default on its debt in just a few short weeks.

 

Every year, this debt ceiling event has become one of those last minute causes that needs to be fixed.  But with these new tax cuts, and with the spending that Trump is calling for on the military and infrastructure, this could easily set off a constitutional crisis and a global financial crisis. And none of it would be an inevitable catastrophe, because it is a wholly man-made issue, created by today's inept White House and a US Congress too disorganized or greedy to act in the nation’s best interest.

 

For the past century, Congress had imposed a false statutory limit on how much the United States can borrow. In theory, this limit was supposed to impose fiscal discipline upon the spendthrift politicians.

 

In the real world, it does no such thing.

 

The reality is that the yearly debt ceiling doesn’t restrict how much Congress can spend. It merely restricts the Treasury Department’s ability to pay the bills that Congress has already incurred.  It adds nothing to the actual debt because that limit was already passed and the debt is already there.  Therefore, the real result is that the debt ceiling has become a natural political hostage for the most conservative (ha) of the two major political parties. Every year or so, when it comes time to raise the debt limit, attention-seeking Republican politicians demand concessions in exchange for their precious votes for increasing the debt ceiling.

 

This political strategy has become just so, because every politician knows that because so many countries use the US dollar as the basis for their economy, defaulting on our debt would be disastrous world-wide.  This is their leverage.

Defaulting would make the United States a deadbeat third-world country.  It would send the global financial system into a tailspin, and it would hamper our ability to pay basic obligations to both other nations and for American social programs such as Social Security, Medicare, Medicaid, military salaries and of course, the interest payments on our large debt.

 

It would also be against Section 4, of the 14^th Amendment of the US Constitution which states: “The validity of the public debt of the United States . . . shall not be questioned.”

 

US debt is considered the safest of all world assets, which is why other financial markets are benchmarked to US Treasury yields. If our creditors doubt they’ll receive full and timely payments, Treasury yields will rise.  This will then set off a chain-reaction of panic in the world-wide markets.

 

Technically, the US had already reached its borrowing limit last December. Since then, Treasury has been resorting to “extraordinary measures” to prevent default. This essentially means moving money around so we can meet our obligations without issuing new debt.  At some point, those “extreme measures” will get exhausted, and that point is coming sooner than previously expected due to these latest Trump tax cuts.

 

Back in November, the Congressional Budget Office (CBO) projected that the US Treasury would run through those “extraordinary measures” around late March 2018 or early April. But then Republicans passed their gigantic tax bill.  The new tax law cuts taxes for most Americans this year, which means that withholding from employee paychecks will drop starting in mid-February. Individual income tax revenue will therefore be about $10 to $15 billion less per month than the CBO previously estimated.  Thus, the CBO says the US Treasury will probably run out of money in the first half of March, or sooner.

 

In a letter to House Speaker Paul D. Ryan (R-WI), Treasury Secretary Steven Mnuchin pleaded with the US Congress to “protect the full faith and credit of the United States by acting to increase the statutory debt limit as soon as possible.”

 

Not raising the debt ceiling would seem totally unthinkable. But these days, many Tea Party Republicans like to make a point by holding back their votes for raising the debt ceiling.

 

The US came dangerously close to a default in 2011, prompting Standard & Poor’s to downgrade the country’s creditworthiness. Since then, the nation’s political leadership has only gotten worse.

 

As an example that the debt ceiling is in worse jeopardy.  When Trump assumed office, he appointed as his top budget director, Mick Mulvaney.  Mulvaney had been the ringleader of the 2011 debt-ceiling showdown.  He voted against raising the debt limit increase four times, and he publicly questioned whether it would “be so bad if we stopped paying all our bills”.

 

On top of this, the US Congress has a lot of other time-sensitive issues right now, including hopefully passing an annual budget and negotiating an immigration deal that would protect the “Dreamers.”

 

Republican lawmakers have previously been rewarded for grandstanding and going rogue under Ryan, which hardly suggests they’ll fall in line when a delectable hostage such as the debt limit is there for the taking.

 

The debt ceiling is actually a bogus issue and it can be easily eliminated by the US Congress.  The best thing Congress could do, would be to eliminate the debt ceiling once and for all. But barring that, resetting the doomsday clock for another year ASAP, well before markets begin to panic, that would still be better than nothing. 

 

But based on this president and this Congress, I’m not holding my breath.

 

Copyright G.Ater  2018