Like it has in the past, the debt ceiling political circus has passed through the flaming hoops just before the default deadline.
The Senate approved the compromise bill Thursday evening, and the legislation is on its way to President Biden’s desk as I type this update.
So what, exactly, will become the new law of the land? That depends on who you ask…
Here’s how Biden described the new debt ceiling legislation following his negotiations with Speaker McCarthy:
The agreement protects my and Congressional Democrats’ key priorities and legislative accomplishments. [It] represents a compromise, which means not everyone gets what they want.
Does that mean Biden didn't secure a "blank check" for more spending?
Well, yes and no… You have to remember, the debt ceiling is about the past, not the future:
A vote to raise the debt limit does not authorize additional government spending. It merely permits the Treasury to meet obligations that were already approved by Congress in the past, some of them, decades ago. [emphasis added]
Now that we’ve settled that, let’s see what’s inside the legislation Representative Marjorie Taylor Greene famously described as a “sh*t sandwich.”
For the federal government, business as usual
The short version: the government will kick the can further down the road (and hope they don’t run out of road).
A “suspension” of the debt ceiling. Rather than raising the cap on the nation’s credit card, this bill simply lets the U.S. Treasury ignore it until January 1, 2025. At which point, we’ll have another performance of the three-ring debt-ceiling circus.
A weak cap on discretionary spending. Non-defense spending would be capped at 2022 levels for the next three years.
A 3% increase in defense spending.
Only $70 billion (rather than $80 billion) in special IRS funding.
Reclaiming $28 billion in unspent COVID relief funds (that’s right, of the $4.6 trillion in pandemic spending, 0.61% remains.) Honestly this is the government equivalent of searching for pennies hiding in sofa cushions…
And to add insult to injury, the infamous Inflation Reduction Act survived unscathed:
But in a big win for Democrats, the deal keeps intact the hundreds of billions of clean energy funding in Democrats’ trademark climate law, the Inflation Reduction Act, that Republicans had sought to repeal.
Notice anything missing from this plan?
There’s no discussion of a balanced budget. None.
There’s no plan for paying down the U.S. national debt. Remember, the reason we have a debt ceiling in the first place is to curb the government’s habits of mortgaging our future. Somehow, that didn’t quite get addressed here.
There’s no limit on spending – at least, not until January 2025. That’s right – there’s no limit on federal spending for the next year and a half. Except Congress, but remember, they already passed the legislation they no longer want to fund.
I can’t say it more clearly than this, folks: this is not a solution. This is nothing but an attempt to temporarily ignore the problem. Let the next guy worry about it.
Since its creation in 1917, the debt ceiling has been raised 90 times.
Guess how many times it’s been lowered?
That’s right: zero.
Now, you’d think that the one person in Washington who seems most concerned about our nation’s ability to pay the bills, Secretary of the Treasury Janet Yellen (keeper of the government’s checkbook) would be annoyed right now.
After all, this clearly isn’t a solution. It’s just a time out.
But Yellen doesn’t seem very concerned. Why not?
Inflating away the debt
I recently discovered this summary of Yellen’s economic philosophy regarding government debt and spending. It was a real eye-opener, even from its title, Why Yellen Doesn’t Lose Sleep Over U.S. Borrowing That Alarms Most Americans:
Plenty of others, including Federal Reserve Chair Jerome Powell, have warned that the US debt trajectory is “unsustainable.”
[Yellen] shows little concern when reflecting on government spending. “That is not something to feel we’re in a catastrophic situation,” she told Bloomberg News in a May 13 interview.
She prefers the ratio of interest payments – crucially, after adjustment for inflation – to GDP.
This sounds strange, doesn’t it?
It makes a whole lot more sense when we remember that the value of a dollar changes over time.
Here’s how it works:
- Money-printing causes inflation. It doesn’t matter if that money is “printed” by deficit spending or by the Federal Reserve.
- Inflation increases tax collection. Whether it’s capital gains taxes paid when you sell assets at inflated prices, higher property taxes on inflated home values or whatever, government income rises.
Don’t believe me? Check out Federal Tax Receipts Boom, Powered by Inflation:
The government taxes nominal wages, which are increasing thanks to inflation, even if most people’s pay is falling once rising prices are taken into account.
Much, though not all, of the tax code is indexed for inflation, and only imperfectly.
- Meanwhile, the value of the debt declines as inflation rises. The dollar-denominated debt doesn’t decline – rather, as the purchasing power of all dollars declines due to inflation, so does the debt burden.
That’s right. The very same force that’s driving American households into record debt just to pay the bills is actually helping the government stay ahead of the game.
Yellen may not admit it, but she’s counting on inflation (caused mostly by massive government spending) to keep the U.S. from going bankrupt.
Meanwhile, your taxes go up and your savings are bled dry.
As you can see, there’s no “official” plan to deal with the U.S. national debt by robbing every single American. Because if the White House announced this secret plan, there would be riots in the streets.
So now you know the real plan for dealing with the nation’s debts. What are you going to do about it?
Opting out of the inflation tax
Congress can keep business-as-usual going for a while. In the meantime:
And every single American is paying for it. If your savings are dependent on the value of the dollar, you’ll probably want to investigate historic stores of value that aren’t dependent on any government keeping its promises…
Physical gold and silver aren’t dependent on the “full faith and credit” of the U.S. government for their value. Real, tangible gold and silver are untraceable, unhackable, uninflatable – there’s a reason they’ve been historic safe haven assets throughout human history.
If you want to protect your financial future from inflation and a crashing dollar caused by and out-of-control government spending, I strongly recommend you learn more about diversifying your savings with assets the government can’t tamper with.
Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver. Based in the Los Angeles area, the company has been in business since 2003. It has an A+ Rating.
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