Friday, July 15, 2011

Sealing our fates, Part One

So of course the debt ceiling (shudder, tremble, weep) remains THE BIG NEWS of the day as far as the media and the pundits are concerned - because after all, what affects the banks is surely more important than what affects tens of millions of ordinary people, like, y'know, jobs 'n' stuff. Well, seeing as who am I to question my betters, herewith Part One of a few observations on the matter.

First, a quick and grossly oversimplified lesson for those who have been in a coma the past several months. If the federal government runs a deficit in its budget one year, it finances that deficit by selling bonds - in effect, borrowing money. So now there is a debt, including the interest on those bonds. Continue to run deficits and that debt grows. The debt ceiling says the government can only owe so much money at a time. If that ceiling is reached, the government can't sell more bonds - can't borrow more money - so in the event of an annual deficit, which of course we have, the federal government will default on its debts, be unable to pay it's bills. As a general rule, this is not a good thing.

Because of this, and the fact that the US has never defaulted on a debt and US Treasury bonds are considered to be among the most secure investment anywhere, raising the debt ceiling has in the past been pretty routine. In fact, the ceiling was raised something like 16 times during the Shrub administration. But now the GOPpers, driven to a significant extent by their new crop of extremist ideologues who are opposed to government spending money on anything except their salaries and perks, figure they can use the debt ceiling like a club to attack social spending and force crippling cuts in every program they don't see as benefiting them personally.

Interestingly, however, one noted ideologue has come up with an interesting idea for dealing with the debt ceiling: Rep. Ron Paul is suggesting that Congress should tell the Federal Reserve Board to burn the $1.6 trillion in government bonds it holds. Destroy them. Don't collect any interest, don't reclaim the principal.

The Fed has bought those bonds over the last two and a-half years or so and they are part of the $14.3 trillion debt that is subject to the debt ceiling. The thing is, however, that the Fed is an agency of the federal government. Its assets are assets of the federal government. Which means the bonds held by Fed literally represent money the government owes to itself. Indeed, each year, the Fed collects the interest on those bonds and then refunds it to the Treasury.

Unlike the debt held by, for example, the Social Security Administration, there are no obligations that the Fed must use these assets to meet. No one loses their retirement income, in fact there is no direct loss of income to anyone if the Fed destroys those bonds. The government could cancel them without harm to itself or anyone else.

Comparisons between government budgets and household budgets are rarely valid, so I'm not drawing any exact correlation here, but just for the purpose of illustrating the idea, you could say it was like you took some money out of a long-term savings account to pay a bill with the intention of paying that money back in later. You keep a record of that amount, counting it as part of your total debt right along with your mortgage, your credit card balance, your outstanding car loan, whatever. If at some point in the future you say "Oh, time to be real: I'm never going to pay that savings back, forget it," you could do that without altering your economic condition one bit. You would still have the same obligations to others you had before that and still have exactly the same assets to meet them.

It's the same here: If Congress told the Fed to burn the bonds, it would have absolutely no impact on government assets - but it would reduce the debt subject to the debt ceiling by $1.6 trillion. Enough, it's estimated, to give the politicos something close to two years to blather on and maybe, just maybe, talk about something that matters.

So it’s a clever idea. So of course it will go nowhere. And there are very good reasons for that. Here’s one:

Back in April, the Congressional Progressive Caucus produced a budget - not an outline or a framework, an actual budget plan - that would not only balance the budget in 10 years, it would produce a surplus and do it without harming domestic programs. Instead it would focus on cutting military spending, ending the wars in Iraq and Afghan, and raising taxes on the rich.

It's quite possible you never heard about this plan. That's because the media almost completely ignored it. In fact, our "paper of record," the one that brags it has "all the news that's fit to print," the New York Times, has never mentioned a single word about it.

Fast forward to July 8, when Sen. Kent Conrad, who chairs the Senate Budget Committee, released a budget proposal designed by committee Dems. This one would reduce the deficit by $4 trillion over 10 years, half via tax hikes on the rich and half via spending cuts, with large cuts coming in the Pentagon budget. Only - the word "only" here being used merely by way of comparison to what PHC* has proposed - $350 billion of the total cuts would come from domestic spending and only $80 billion of that from Medicare and Medicaid. Social Security would be untouched.

Other than one passing reference in an editorial, I can't find a single mention of it in the New York Times.

What did the Times have space for? In late June, it covered the announcement by the well-financed right-wing lobbying group FreedomWorks that it intended to organize its own debt commission with the intention of having some proposals by next January.

So a real budget proposal by the Congressional Progressive Caucus isn't worthy of coverage. A budget plan presented by the chair of the Senate Budget Committee is worth just a passing mention. But a tea party press release about plan for a commission that doesn't even exist yet to make proposals six or seven months from now? That gets attention.

And still we wonder why we're in the mess we're in.

Parts Two and Three later today.

*PHC = President Hopey-Changey

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