The United States of Jamaican Economic Policy

Earlier this year, news reports of gloom and doom started to flow into the media:  if we do not raise the ceiling for the amount of debt the Treasury can issue and carry, we are doomed.  Austan Goolsbee, chairman of US Council of Economic Advisors, said if Congress fails to raise the debt ceiling, the "impact on the economy would be catastrophic."  He goes even further to say that doing so would "damage the full faith and credit of the US," and "would be the first default in history caused by pure insanity."  In an ABC News interview, he stated "This is not a game. You know, the debt ceiling is not something to toy with. … If we hit the debt ceiling, that's essentially defaulting on our obligations, which is totally unprecedented in American history. The impact on the economy would be catastrophic. I mean, that would be a worse financial economic crisis than anything we saw in 2008."

Here's the rundown currently:  the debt ceiling is currently at $14.3 trillion.  In the past 10 years, we have seen the debt ceiling raise 10 times.  The past three have been the most damaging:  +$1.5 trillion in 2008, +$1.08 trillion in 2009, and +$1.9 trillion in 2010.  (In years previous, the debt ceiling was raised maybe once every two to three years, and then only by $500 billion, but that policy has obviously changed.)  This puts the current debt-to-GDP ratio at 93.5%, dangerously close to default levels.  Just for comparison, Ireland's debt-to-GDP is forecasted to reach 93% this year, and everyone is talking about how the sky is falling there.  However, a forecasted 100% supposedly seems to pose no problem for the United States.

The US should take a hard look at the story of Jamaica.  The following quote is from the CIA's World Fact Book (click the Economy tab):
"The Jamaican economy is heavily dependent on services, which now account for more than 60% of GDP. ...The economy faces serious long-term problems: a sizable merchandise trade deficit, large-scale unemployment and underemployment, and a debt-to-GDP ratio of more than 130%. Jamaica's onerous debt burden - the fourth highest per capita - is the result of government bailouts to ailing sectors of the economy, most notably to the financial sector in the mid-to-late 1990s.  The government's difficult fiscal position hinders spending on infrastructure and social programs, particularly as job losses rise in a shrinking economy. ...High unemployment exacerbates the crime problem, including gang violence that is fueled by the drug trade."

So let's see here:

• Economy's service sector provides about 60% of GDP, check.
• Large scale unemployment and underemployment...... check.
• Debt burden due to government bailouts of... ohgahd

In addition to all of these problems, few creditors are looking to buy US Treasury bonds any more.  The Federal Reserve, which loans the US Treasury money to begin with, has been picking up more of the tab recently through Quantitative Easing.  The Fed previously held between $700-800 billion in US Treasuries, but now is holding an astonishing $2.054 trillion.  They even plan to buy $600 billion more in treasuries this year.  (I'm wondering if that is dependent upon the debt ceiling being raised.)  This practice allows the Fed to print money and flood the market with it.  They were hoping the first two rounds of Quantitative Easing would boost the economy out of the recession, but I think a critical look around would say otherwise.  (If you want another explanation and like those stupid xtranormal text-to-speech videos, check this one out.)

They've got a word for this - it's called inflation.  If they continue with this practice, this could lead to hyperinflation through what is known as The Vicious Circle.

This is why Austan Goolsbee's comment about "damaging the full faith and credit of the US" cracks me up - it has already been damaged, and faith and credit are both drying up.  I'm not sure how creating money out of thin air and obtaining more debt is supposed to help that either.  This is akin to getting one credit card to pay off another that's been maxed out.  You don't have the money to pay either card, but with each successive card, you have the ability to keep running on credit.  Eventually, you're going to run out of credit cards, and then once you no longer have the ability to make minimum payments, you face bankruptcy.  The same thing will happen for the US government eventually.  Right now though, we're just wondering if any more card offers will come in the mail.

We're also wondering if the collection sharks will start calling to beat some money out of us.  China at least has us on speed-dial at the moment.

So, let's assume the US debt limit is not raised.  Let's assume we default on our debt.  Then what happens?  Nobody is for sure.  The fearmongers in Washington have stated it create a catastrophic impact that would be a worse financial crisis than the one in 2008.  Along their train of thought, the markets would probably lose all faith in domestic investments due to immediate de-valuation of currency.  Many social programs, such as Social Security and Welfare, would probably be immediately axed in an attempt to balance the government budget, destroying wealth for many lower-income Americans.

I'm more inclined to believe a world financial institute will try to bail us out though.  The International Monetary Fund will most likely extend their long arm to buy our debt, just like they have with Greece, Ireland, and once again Jamaica.  This will allow the Fed to continue the practice of buying Treasury bills in order to print money and pump it into the economy, leading to more pronounced inflation both domestically and worldwide.  The US government would be in some real trouble then - their grip on the world financial market would loosen at a very fast pace.

So here's my biased opinion, as a free market advocate:  the US needs to hold the debt ceiling.  Mr. Goolsbe was right:  this is not a game, and the debt ceiling is not something to toy with.  The government needs to default.  They need to feel the pain of their out-of-control deficit spending.  Wasteful spending needs to be cut.  Changes need to be made.  The change might be rather radical - something that would most likely to an improved system, because the current one sucks.  We must resist bailouts from both the Fed and the IMF - they would only lead to inflation, which would cripple the economy permanently as it did in Jamaica.

We cannot compromise on this.  Tea Party hacks like John Boehner (more like boner, amirite?) support a debt limit increase if we cut government spending.  Sorry, but we can't possibly hold the promise to cut government spending while increasing the debt limit.  The truth is the US is addicted to debt.  They need to get more to do more.  They make promises to hold back and cut select programs, but the debt still continues to grow and grow and grow.  Handing the government more debt while promising to cut the budget is like giving a heroin addict a large fix, but requesting that they do less each day.  It simply won't happen.

Either way, we're damned if we do, and damned if we don't.  We can hold the debt limit steady and be damned in the short term, continue to increase it and be damned increasingly over time, or hold out on an IMF bailout, which would damn us forever.  Godspeed for this country.