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Debt Ceiling Madness

August 02, 2011 | About:
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The Daily Reckoning

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First, we turn to the news. And what do we find? Netscape’s “Money & Business” has this report:

The House on Monday evening passed a bill that would raise the U.S. debt limit by at least $2.1 trillion and cut spending by a similar amount over the next decade. The agreement was reached Sunday night by congressional leaders and President Barack Obama. The Senate is expected to approve it on Tuesday, and it will go to Obama, who has indicated he will sign it.

If you read that fast enough, and drink enough whiskey, you might even think the feds have the situation in hand. Cut spending by an amount equal to the debt ceiling hike…hmmm….sounds almost like you come out even.

But wait, these are two very different things. If you would come out even, there would be no need to increase the debt ceiling. Instead, the deal allows both spending and the debt to go up. It will go up $2.1 trillion…and then, they’ll raise the debt ceiling again.

And yes, they will ‘cut’ spending too. From about $45 trillion over the next 10 years…down to $42.9 trillion (we’re just estimating…we haven’t seen the feds’ numbers in any detail). A $2.1 trillion cut.

Analysts for the feds say they need about $4 trillion in cuts in order to keep the situation under control. That would allow the debts and deficits to increase…but at a pace equal to the growth in the economy.

Alas, the poor schmucks have no idea what they are doing. They base their assumptions on growth rates registered BEFORE the Great Correction began. They assume a full recovery, in other words.

It ain’t gonna happen…for all the reasons Dear Readers know so well.

…an economy burdened by debt does not grow very fast

…an economy that is in the middle of a debt contraction barely grows at all

…forget adding more cash and credit ‘stimulus’ – it doesn’t work when an economy is already drenched in debt

…the US economy is also burdened by the cost of maintaining a military empire – costs that aren’t going away

While revenues will not meet expectations, spending will exceed them. Why? Because the softness in the economy will leave more and more people on government support. Already, 59% of the public gets money from the feds. And because spending ALWAYS exceeds expectations…

Even $4 trillion worth of budget cuts would probably not be enough…not by a long shot.

As we told the investment conference in Vancouver, there is something bigger, more important going on. A Great Correction is underway. We wait to find out what it will correct.

…a real estate bubble?

…a bull market in stocks?

…a credit expansion?

…a great empire?

…the rise of the European powers after the invention of the steam engine?

…the outsized gains brought by using cheap oil?

We don’t know its final destination. All we know is that a Great Correction is underway.

Regards,

Bill Bonner,

for The Daily Reckoning

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