Debt-ceiling lies

Lies, lies, and more lies.

If we don't raise the debt ceiling
- we will default
- we will endanger the full faith and credit of the United States ("for the first time" - Barack Obama, July 11, 2011)
- global financial markets will go into chaos
- we need to borrow more to pay our obligations
- "if not now, when?" - the lie is about continuing profligacy, not what a few fiscally responsible people talk about- how if not now, when do we get this debt under control?
- We just need a balanced budget amendment

1.
This is a great article about why there is no chance of a default.
In short, because monthly federal revenues are about 10 times greater than interest payments, there is no reason that the Treasury needs to default. There will even be plenty of revenue to pay back principal, should bond holders chose not to reinvest. In that case, the national debt would go down and the Treasury could issue new bonds up to the debt-ceiling.

2. How exactly does making a statement and holding the line that we will NOT borrow any more endanger our credit rating. Some point out that not passing an increase in the debt ceiling would demonstrate how chaotic and dysfunctional Washington, DC is, and therefore would endanger the credit rating of the US Government. To me, this argument seems as media-manufactured as Tim Pawlenty's Presidential candidacy. Don't get me wrong, Washington, DC is incredibly dysfunctional, and I don't believe that they will come to their senses about cutting military and entitlement spending (the two largest expenditures)- but it is the inability to do this, Not the inability to raise the debt ceiling, that creditors will worry about. Combining the will to maintain a hard cap on the debt and the ability to make timely payments on interest and principal, how can any rational actor conclude that it will be RISKIER to invest in government debt? (I think it is increasingly risky, but for other reasons. These particular reasons above actually put downward pressure on the risk.) The past several Presidents and Congresses have endangered the full faith and credit of the United States government, but not raising the debt ceiling should help to mitigate at least a little bit of the damage that the politicians have caused to the reputation of the national debt.

3. The only way global financial markets can be effected if Congress doesn't raise the debt ceiling is if financial market actors had the expectation that the debt ceiling would be raised. And by shattering this expectation, while maintaining point 1. above, this should actually put DOWNWARD pressure on the interest rate of Treasuries (see point 2. above). I don't see how downward pressure on Treasury returns would put financial markets into a panic. Most mainstream economists would say that this is a positive development because the government could then sell new Treasuries at lower rates (better if we want to shrink the deficit!).

4. We need to borrow to pay our obligations. First, see the article in number 1. There will be more than sufficient funds to pay the interest on the debt, which for better or worse, is obligation number one. Second, there will be plenty of funds left to prioritize. There is a social security trust fund (okay, it's mostly fake, but it's fake because it holds government debt instead of cash- but guess what, that debt is part of the national debt- the very debt that the Treasury can afford to pay "10 times over" according to the article cited in 1. above.

5. There is talk that something must be done about the deficit, from both sides of the isle, from President Obama, and even from Fed Chairman Bernanke. But many claim that we can't do this yet due to the fragile recovery. I'm not getting into an economic rant here, but as evidenced by short-lived but deep depression of 1920-1921, the Great Depression, and the current depression (yes, we are in a depression, contrary to NBER's claim that the "recession" ended in '09), government spending does not help the economy. It might mitigate certain effects on some regular people during a downturn for a while , but it actually increases the duration of the downturn and prevents the recovery (like anti-poverty programs help families cope with poverty, but they don't help them get out of it and can actually perpetuate poverty).

6. Politicians like Senator Rand Paul (who has been surprisingly good on going against the GOP establishment on issues such as foreign aid to all countries and the USA PATRIOT Act) are misguided by agreeing to raise the debt ceiling if the senate agrees to a Balanced Budget Amendment to the US Constitution. First, there is no guarantee that both Houses include it in the bill to raise the debt ceiling. Second, even if they do, there is no guarantee that the powers that be wouldn't remove it during conference committee after the bill to raise the debt ceiling is passed by both Houses. Third, it can take many years for 3/4ths of the states to ratify a Constitutional amendment. In short, Paul and other politicians who cave on raising the debt ceiling will probably get shafted along with the American taxpayer. The debt will go up, tax loopholes will be closed, tax rates might go up, spending will not decrease.

I agree with his father's idea that any "deal" to raise the debt ceiling that promises future spending cuts is a total fraud.
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More of a longer term, worst case scenario (expect some of this to happen, the question is how out of control will this get):
WHEN (not if, but when, yes I believe it will happen) the debt-ceiling is raised, there will be the expectation that the government will borrow more. This should increase increase the risk premium and therefore interest rates on government debt. In turn, the Fed will need to buy up bonds order to hold the federal funds rate between 0 and 25 basis points. This might trigger a substantial growth of the Fed's balance sheet without a formal "stimulus" program (QE3). As inflation expectations increase, so will interest rates, which will trigger more stimulus from the Fed. A perpetual cycle of this would lead to a collapse of the dollar. I don't think that the bankers who have stake in the Federal Reserve System would allow a total collapse as this scenario envisions, but again, this is the worst case scenario.