Bill Bonner

The feds got over the first hurdle. They cut a deal to keep the government in business a while longer.

But that’s not the end of the story. It’s just the beginning.

The New York Times has the story:

Congressional Republicans are vowing that before they will agree to raise the current $14.25 trillion federal debt ceiling – a step that will become necessary in as little as five weeks – President Obama and Senate Democrats will have to agree to far deeper spending cuts for next year and beyond than those contained in the six-month budget deal agreed to late Friday night that cut $38 billion and averted a government shutdown.

Republicans have also signaled that they will again demand fundamental changes in policy on health care, the environment, abortion rights and more, as the price of their support for raising the debt ceiling.

In a letter last week, Treasury Secretary Timothy F. Geithner told Congressional leaders the government would hit the limit no later than May 16. He outlined “extraordinary measures” – essentially moving money among federal accounts – that could buy time until July 8.

Once the limit is reached, the Treasury Department would not be able to borrow as it does routinely to finance federal operations and roll over existing debt; ultimately it would be unable to pay off maturing debt, putting the United States government – the global standard-setter for creditworthiness – into default.

The repercussions in that event would be as much economic as political, rippling from the bond market into the lives of ordinary citizens through higher interest rates and financial uncertainty of the sort that the economy is only now overcoming, more than three years after the onset of the last recession.

Here’s the story. The feds spend more than they “earn” in taxes – almost 100% more. That gives them only two choices…balance the federal budget, by raising taxes and/or making spending cuts…

Or…borrowing money.

Borrowing is a lot easier than taxing or cutting. So, that’s what they’ll do. Forget the grandstanding…forget the agit-prop theatre…

…they either borrow…or they balance the budget.

And they’re not going to balance the budget. Because too many voters expect to get more from government than they have paid for. That was the unstated promise of modern, social welfare governments:

Let us control your lives. We will give you more in benefits than you pay for.

How can you give people more than they pay for? Only by taking the money from someone else. But governments have learned that taxing the rich heavily actually reduces the GDP and the amount of money that can be given to voters. So, they turned to taxing the next generation.

After all, they don’t vote.

Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success in numerous industries. His unique writing style, philanthropic undertakings and preservationist activities have been recognized by some of America's most respected authorities. With his friend and colleague Addison Wiggin, he co-founded The Daily Reckoning in 1999, and together they co-wrote the New York Times best-selling books Financial Reckoning Day and Empire of Debt. His other works include Mobs, Messiahs and Markets (with Lila Rajiva), Dice Have No Memory, and most recently, Hormegeddon: How Too Much of a Good Thing Leads to Disaster. His most recent project is The Bill Bonner Letter.

  • http://www.investorsfriend.com The InvestorsFriend

    There is one other way…

    If you can’t keep you current spending below your current income you can sell off some assets.

    Surely the United States Federal Government has some things it can sell off?

    Must be a few buildings that can be sold…

    Sell every road and make it a toll road.

    Sell every airport too.

    What about national parks? Sell ‘em off!

    The rights to offshore drilling.

    Sell Sell Sell.

    Later if things really get desperate you can sell off a few states. Canada will be interested in Arizona as a refuge from our cold winters.

  • CommonCents

    Question is how long can they keep up the charade?

    Japan’s been doing if for more then 20 years, USSR maybe even longer. How will our collapse emerge? This country tends to do things with a lot of grandeur.

    Our collapse shall be spectacular too, not a whimper like Japan more like USSR.

  • Extincting Species

    If every channel to Rome is impassable, picky is no more a discretion. Action rather than idle. What else … print plus print for the remaining days. After all doom is already in sight.

  • JMR

    I really enjoy reading articles on this web site. I think I may find some of them more humorous that some other readers. Sure, I think that QE1 was necessary and that QE2 went too far. But QE2 only went too far at about the halfway point. It’s an interesting arguement to say that the dollar is being devalued to payback debts with a lower value currency. That’s an arguement in most economic textbooks, but it is a little “cutting of a nose to spite the face”. Regardless…

    I started buying gold in small amounts in 2001 because gold could be bought then for the mining cost and the fabrication was basically free. To me it represented a way to save which was an alternative to bank deposits. It turned out to be the second best investment I ever made; the other was land. I like to read this site because gold was so good to me. I don’t have the money to invest to save anymore, but I would like to know more about how buying gold can be justified at these prices when major gold mining companies produced gold for an average of $467 per ounce. Today’s price is an over 300% mark up from production cost. If the currency doesn’t collapse, isn’t this period of prices likely to be looked upon as a high point that would take a lifetime to recover from if you bought at these prices.

    Bill has been talking about real estate as an investment instead of mentioning gold very often. We are at a low point in prices which represents a good value, and he always makes the point they they could still go lower.

    Still, I like to read Mogambo’s stuff. It’s not as funny as a few years ago, but still entertaining. Those bits he used to do about his bunker and burritos and candy bars used to have me laughing myself into tears.

  • JMR

    Continuing what I said about precious metals being “expensive” today. As a child, I enjoyed coin collecting with my father. I have some silver coins that I bought in 1984 that have only recently come into a value where I could get a small profit. I don’t care about how long that took because it was a hobby and not an investment. I’d hate to see people buying something today and have to hold it for more than 25 years just to break even. I don’t know what tomorrow will bring. Many say that gold will drop when QE2 ends. But that’s not to say that QE3 won’t happen after the end of QE2 makes equities drop 15%. Then, it would be an interesting environment to see QE3 with rising rates too! I don’t know if even that would be supportive of gold.

    But at these prices, my coin collection has dwindled to nothing that has precious metals. I sold most of it, but some was stolen. I had a 25 shilling coin from Somalia that was given to me when I was eight years old. I was excited to find the coin and to finally know more about the country it was from when they tstarted talking about pirates. I was dissapointed to find it stolen from me after a trip I made where I was gone for three months trying to find a job by traveling and sleeping in my car for three months.

  • Unguided Missile

    The meaning of the term “price” is rather intertwining, confusing or subjecting.

    A $10 stock we bought may actually worth a couple of dollars in real term. Which virtually means we had acquired half the piece of A-4 size paper at the cost of a few thousands dollars. A long-life oil field though incurred heavy investment initially, but the gushing is still vigorous after 50 years would almost see the zero marginal cost within striking distance. But, crude remains hovering over 100, notwithstanding. Shrinking housing that has resulted numerous purchaser unable to meet the mortgage is another vivid example.
    So, I don’t see any strange behaviour or distortion in precious metal dealing.
    We live now for today. We don’t even know what will happen right in front of us – tomorrow.

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