Raising The Debt Ceiling Solves Very Little

Now that the debt ceiling has been raised it appears we are all saved, or are we? While the market took a sigh of relief and started partying does not mean all is well. This may remove some of the uncertainty of how Washington was going to handle this issue it does not indicate smooth sailing ahead. The issue of how to get our deficit under control remains.

Harvard professor and former IMF chief economist Ken Rogoff appeared on 'Squawk Box' to discuss the debt ceiling and why a last-minute deal does not solve America's underlying problem. Our challenge is rooted in government spending and politics. Rogoff went on to say he thinks interest rates are going to stay high or go up over the next year. He clarified that several factors indicate upward pressure on real interest rates remains. 

Raising the debt ceiling does nothing to make the massive albatross of debt hanging around the neck of America go away. Instead, it merely allows for bills to be paid and more obligations to be heaped upon us. As Yellen begins to issue new bonds to refill government coffers expect money and liquidity to be drained from the financial system. 

Another issue is that it most likely blows away Biden's false promise to many of the people owing student debt that always was tenuous at best. This means borrowers will have to begin paying back their student loans at the end of the summer which will further reduce consumer spending. Still, the package maintains Biden’s plan to provide up to $20,000 in debt relief for qualifying borrowers, which is before the Supreme Court that should be ruled on in the coming weeks.

This passed just days before the Treasury Department would have run out of funds to pay all of the nation’s obligations in full. It contains provisions that many lawmakers didn’t support but that did not slow the Senate from passing the bill. The legislation suspends the nation’s $31.4 trillion debt limit through January 1, 2025. This mutes some of its impact as a potential issue in the 2024 presidential election.

The deal is that non-defense spending will remain relatively flat in fiscal 2024. It will increase by 1% in fiscal 2025. After fiscal 2025, there are  just non-enforceable appropriations targets rather than solid caps. Still, the "House GOP fact sheet" claims that non-defense discretionary spending will be rolled back to fiscal 2022 levels and top-line federal spending will be limited to 1% annual growth for the next six years.

This legislation does little to roll back any of the waste thought to exist in the Inflation Reduction Act. This is a law Republicans had sought to repeal because it contains many economy-distorting clean energy tax credits and subsidies. The fact the debt ceiling bill requires agencies to complete environmental reviews in one year, or two years for the most environmentally complex projects will most likely only muddy the picture of where we are headed. 

Also, it does not stop the roughly $80 billion increase in IRS funding over 10 years contained in the Inflation Reduction Act. This bill merely 'repurposes' $10 billion from fiscal 2024 and another $10 billion from fiscal 2025 appropriations to be used in non-defense areas. This provision does not even appear in the text of the bill but it is said, both sides have agreed to it. Other than that, the legislation will also rescind $1.4 billion in IRS funding from the act. Still, this does not limit the IRS from requesting additional money from Congress while the bill is in effect.

Raising The Debt Ceiling Is A Poor Way To Deal With Expanding Debt!

The pathetic excuse for reductions put forth in this bill does not even amount to putting lipstick on a pig. For example, the adjustments will bring the resources available for spending outside of veterans’ medical care to $637 billion for the coming fiscal year, compared to $638 billion for the current one. The fact is shifting a few billion here or a few billion there when talking about such huge numbers generally means very little. How efficiently a specific part of our government functions determines how well the funds are spent. 

Being hailed as wins are the package calls for temporarily broadening work requirements for 'certain adults' receiving food stamps. Yet, it could be argued these gains vanish as the bill also expand exemptions for veterans, people who are homeless, and former foster youth in the Supplemental Nutrition Assistance Program, or SNAP. Work requirements will not be introduced in Medicaid as called for in the House Republicans' debt ceiling bill.

Clawing back roughly $28 billion in unused funds from the massive Covid-19 relief packages that Congress passed should not impress us either. This is out of roughly $4.6 trillion in Covid-19 relief funds Congress approved since the pandemic began in early 2020. Remember that many local and state governments have gone to great lengths to spend this money but simply ran out of ways. 

As sort of a footnote, this bill will also speed the creation of the Mountain Valley Pipeline, a natural gas pipeline in West Virginia. This again stands as another monument to how dysfunctional our government has become. All this is a drop in the bucket and poor-quality political theater. Consider that Congress appropriated over 112 billion dollars to support corrupt Ukraine in 2022. 

It should be pointed out that not only has the 'Ukraine thing' dramatically raised the risk of a nuclear war, but to make matters worse, this so-called aid has been so poorly accounted for. When you add in prior funds and a slew of other 'off-the-book sources' it is said money going to Ukraine may be approaching the 200 billion dollar mark. 

Still, the world rejoices as the can is again kicked further down the road. With this hovering in the back of your mind, I would like to remind you that even though it has been talked about for what seems like forever, the economy and the financial system have not reset. The Great Reset has yet to occur, and when it does it is likely to be a doozie.