Borrow or Balance: The Feds' Only Two Choices

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