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Conservatives should hit the ceiling
By Jill S. Farrell
Congress is about to raise the debt ceiling. In October the Associated Press reported that the government reached the debt ceiling at $7.3 trillion.
The Treasury Department has to be able to sell treasuries to enable the Federal Government to meet its financial responsibilities. This is the odd and uncomfortable situation in which conservatives find themselves.
Total debt is derived by adding deficits plus accumulated surpluses. Deficits require the Treasury to borrow money to raise cash needed to keep the Government operating. We borrow money by selling Treasury securities like T-bills, notes, bonds and savings bonds.
The debt ceiling was enacted in 1917 when the Federal Government encountered the financial difficulties brought on during World War I. Congress enacted the First and Second Liberty Bond Acts, which established the first debt limit, leaving details to the Secretary of the Treasury. It can be argued that Congress delegated its Constitutional authority to borrow money on the credit of the United States to the Treasury Department, though debt ceilings have had little influence over the way in which Congress profligately spends money.
President Bush will start his second term facing a roaring $2.3 trillion minimum in deficits, according to the Congressional Budget Office. At least initially tax cuts, changes to the minimum tax rate and the proposed overhaul of Social Security could add a substantial burden to our existing debt. Might these plans eventually open the throttle on the American economy? Yes, however, it is difficult to imagine the economy growing fast enough to keep up with or exceed our current spending habits.
It is estimated that nearly 40 percent of Federal debt is in foreign hands, which is just about double the percentage from 10 years ago. Foreign interests bought up nearly 70 percent of the $373 billion in Treasury bonds sold in 2003.
There is a co-dependent nature to foreign ownership of our debt. Foreign countries finance a great deal of our debt and also our trade deficit. Since our ability to buy foreign goods depends upon the dollar maintaining some minimum value, foreign Central Banks are unlikely to sell off treasuries and demand instant repayment, which could fatally damage the ailing US dollar.
China's ownership of US debt is nearly a third of the Chinese economy. If the existing trend continues, some experts estimate that the total value of Chinese holdings of US dollars will exceed the total value of China's GDP in a handful of years.
BusinessWeek magazine reports:
"…investors in the Mideast and Asia have gone on a euro buying binge," says Tom Rogers, a currency analyst with Informa Global Markets. "They're concerned that the policies Bush has promised to enact during his second term will worsen an already record federal budget deficit. Left unchecked, investors fear a soaring deficit will lead to higher interests rates, lowering the value of U.S. stocks and bonds."
Which raises the question, if the biggest buyers of US debt are losing faith in our economy, to whom will we sell our debt once the ceiling is raised?
According to Bloomberg, we began this year with a deficit equal to nearly 30% of our total GDP. We must attract about $1.8 billion a day to make ends meet and to maintain the dollar's value.
European Central Bank head Jean-Claude Trichet has described the euro's climbing value against the dollar as "brutal." Because other participants in the world economy are not pleased with the dollar's path, and though the dollar continues to slip, Secretary of Treasury John W. Snow told reporters in Dublin on Monday, "We support a strong dollar -- a strong dollar is in America's interest."
A sickly dollar does have a couple of important advantages. A weak dollar makes it possible to export more goods, and the favorable exchange rate with Canada may draw more Canadian shoppers to Minnesota. However, a declining dollar can lead to inflation by making imported goods more expensive.
The fact remains that record Federal deficits are undermining the economy and the value of the dollar is dropping. The burgeoning US deficit is drawing an increasing number of dollars for interest payments. According to the Bureau of Public Debt, we paid $321 billion in interest payments in Fiscal Year 2004. Those payments are bound to grow as are other economic problems as the debt ceiling is raised, or heaven forbid, removed.
It is imperative that Congress promptly begin to exercise spending restraint. We need to call upon Members of Congress to do the responsible, uncomfortable and dangerous job of cutting wasteful and redundant spending. There will be much wailing and gnashing of teeth from special interest groups and entrenched bureaucrats to a willing, and dare we say socialist-leaning, mainstream media. Congressional restraint won't be easy to achieve. A complete overhaul of the appropriations process is preferable but in lieu of that we can hope for common sense spending cuts.
While a drop in Federal deficit spending may temporarily reduce US economic growth by discontinuing overstimulation of the US market, the Federal Reserve would have the room to keep interest rates lower and that would keep demand energized.
The President and Congress will need our encouragement if they are to begin the process needed to turn our country away from the syren song of "charge" and spend and steer us toward the safe harbor of economic stability.
Jill S. Farrell is Director of Communications of the Free Congress Foundation.
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