The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
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Playing With Matches

Forgive me, but it worries me to see our elected children in Congress playing with fire, by threatening to keep the debt level at the current level.  That means we cannot borrow anymore–immediately, we cannot borrow anymore — on that day.  It would be immediate!  Given that 42% of every dollar spent is borrowed, which means the number of dollars spent must be decreased — immediately.  That could easily include Social Security and Medicare and probably should. 

Since 7% of the Federal budget is required for interest payments on the existing debt, that means the cut would actually be 45%, as only 93% of the budget is available.  And, that 7% share of the budget will immediately start increasing as bond buyers will no longer accept the currently low interest payments they have been receiving and will demand much more.

As we approach the likely deadline of May 16th or so, we can expect interest rates to rise beforehand, because the outcome is so uncertain.  If you think the stock market hates uncertainty, watch the bond market!

I expect an increase in interest rates has a 99% probability if the debt ceiling is not raised, while the cut in entitlement payments is probably less than 50% but still possible.  However, it would greatly accelerate the day when the dollar would no longer be the world’s reserve currency, which would damage us in so many ways.

Our national debt is pushing the current ceiling of $14.3 TRILLION, compared to a relatively paltry $9 trillion just four years ago.  More importantly, our national debt is the greatest threat to America — yes, even greater than the muslin extremists.  But, the debt ceiling is not the right way to fix it.  It would be like using a screwdriver to drive a nail.

But, how can we protect these children from themselves?  How can we protect ourselves??