I do not own a crystal ball, and I would be loathe to use it even if I did. Predictions about the future are predictably wrong, so I am positing this discussion as a speculation—a big “what if”—regarding a question which will come to dominate our national discussions in the weeks ahead.
What if the United States Congress is unable to raise the Federal Debt Limit, and the option to continue to borrow and spend without the least concern is suddenly gone? What will the federal government do when hard choices and—more than likely—deep spending cuts are forced upon it because the money is simply not available?
The reset on July 1st placed the Federal Debt Limit at 28.5 trillion dollars, which is a very worrisome amount of borrowing for a country whose annual total Gross Domestic Product is roughly 21 trillion dollars. Our federal debt has doubled in the decade or so since The Great Recession, and COVID-19 emergency spending has caused annual federal budget deficits to explode into the trillions of dollars over the past 18 months, which is clearly both unsustainable and unwise.
However, beyond the reality of the current debt cliff is a back story that most prefer to ignore. All the money that Washington has been frantically and foolishly borrowing has been buttering the bread of our somewhat illusory American prosperity for at least the past decade—and likely for many decades before.
Like a household propping up their standard of living by maxing out their credit cards, America has been able to ignore obvious structural economic problems brought about by policies that have encouraged speculation rather than production, moved American manufacturing abroad, and hidden the expenses of multiple foreign wars that have brought a little temporary security at a staggering long term financial cost. This game can continue only as long as Congress is willing to play along by authorizing yet more borrowing, but either very soon—or very soon thereafter—this will come to an abrupt and painful end.
As is widely known, the Federal Reserve has been suppressing interest rates for many years in order to make this massive government borrowing bonanza possible, and this shortsighted policy has created an extraordinary lack of caution among investors due to all the cheap loans sloshing through the economic system.
This will change after the easy money evaporates.
When borrowing becomes more expensive, irrational exuberance tends to quickly turn into cold-eyed caution, which impacts everything from individual financial decisions to household purchases to business investments. For example, the tide of return-hungry money that has long been flooding real estate and stock markets because there are currently minimal returns available on personal savings will recede when Americans can earn better—and safer—returns simply by parking their cash in a bank, which is going to send stock and housing prices tumbling as valuations are recalibrated to reflect reality rather than wishful thinking.
More to the point, the borrowed money that has been available for every pet government project, liberal pipe dream, and politically loyal constituency over the past several decades is about to end. Whether it happens today or tomorrow, federal spending will increasingly be focused on the three M’s—Medicare, Medicaid, and the Military—in addition to the growing costs of our stupendously unfunded obligations to Social Security. Arithmetic is unforgiving, and all expenses beyond the essentials will soon find their funding cut. The expansive borrow and spend phase of American governance is taking a last spin around the dance floor before the lights are turned off—for many decades to come.
Taxes will increase, regardless. Although Liberals will continue to push the Big Lie that there is plenty of money available if the rich just pay their mythical fair share into the Treasury coffers, the reality is that the numbers just don’t add up no matter how fervently Big Government advocates want it to be true. Obviously, the most likely victims of the federal government’s next desperate money grab will be the 61% of Americans who currently pay no federal taxes whatsoever. Expect some sort of minimum alternative Federal income tax to wriggle into everyone’s pockets in the near future. This will inflict pain while solving few of our nation’s budgetary problems unless spending is reined in.
Even if Speaker Nancy Pelosi and Majority Leader Chuck Schumer are able to wrangle some sort of emergency suspension of the Federal Debt Limit through the House and the Senate in the weeks ahead, it will only temporarily forestall the inevitable reckoning. We will be right back where we started—and even worse off than before—within just a year as the bills coming due continue to implacably and immutably snowball.
Over the next several years, many functions of the federal government will need to be either eliminated or privatized in order to balance revenues and spending. The number of federal employees, contractors, and consultants will certainly shrink. In addition, the Liberal fantasy of free—well, everything—and ever expanding government programs will be mercifully consigned to the scrap heap of history.
State and local governments will also be forced to tighten their belts dramatically as federal largesse slows to a trickle. The questions regarding all federal and state spending will more and more revolve around whether we should prioritize our obligations to the elderly or our investments in the young when deciding how scarce dollars are spent. Many of these discussions will be hard and bitter, and blame will fall on both major parties as they are each castigated—depending on the particular program under review—for being either too stingy or too profligate with our remaining tax dollars.
This new reality will be a disorienting and distressing shock to both our political system and most Americans, who have each grown accustomed to the unreal and undemanding Santa Claus model of governance. Many will regret seeing it replaced by purely penny-pinching parsimony.
Nonetheless, any nation that must live on borrowed money is living on borrowed time. Although America is a truly exceptional nation, it is not an exception to this ironclad rule. Over the course of history, we have seen—again and again—that excessive government debt always leads to disastrous societal collapse, and we cannot ignore this reality any longer.
We can hopefully avoid this fate if we are smart today, or we can pay a terrible price for our irresponsibility tomorrow.
The choice must be made right now, and no amount of self-comforting blather or misleading math can avoid this simple fact. This is a time for adult responsibility—not childish games.