Another act of the play called US Debt Ceiling Revision is over. It has been performed for many years. For almost three weeks the US budget crisis, that could possibly entail a default, has been the hottest issue on the radar screen. Two problems have been in focus: the government shutdown since October 1 and reaching the limit of debt ceiling. Late at night, October 16, the House of Representatives approved the compromise on the budget to avoid the «technical default» and open the government with state agencies able to renew activities. The measure was approved by 285 to 144 vote. The bill was approved previously by Senate on the same date.
The main idea behind the scenario is that America can and should go on increasing national debt. That is something the grassroots have become accustomed to. The people have been instilled with the idea there is no option and this is the only way out of the financial crisis. They are told that if the ceiling is raised the government will be free to issue treasury bonds home and abroad so that the money flows would come to fill the state budget. Nobody has even discussed the very expediency of raising the debt ceiling at all…
The debates have been focused on details, like the limit of the new ceiling and what could Republicans get in return for their approval, or would it serve the purpose if the ceiling was cancelled and the government would be given a free hand to go on spending spree. The both US political majors agree the ceiling should be raised. Wall Street and London City bankers have called for the limit to be immediately reviewed.
The calls have been joined by such countries as China and Japan, which together hold more than $2.4 trillion in U.S. treasuries and are afraid of devaluation. Fitch agency also raised its voice for reaching a compromise threatening to downgrade the US rating. The International Monetary Fund wanted the ceiling raised, it is widely believed, and not without reason, that a so-called technical default of US government would trigger a world financial crisis.
There are opponents that say the idea of increasing the national debt is wrong, the indebtedness has been growing by leaps and bounds in recent years. Extrapolating the trends of the past to the middle and long-term prospects one can infer that the US economy is in for collapse. The national debt is produced by the disbalance of federal budget. The US national debt at any given time is the sum of surpluses and deficits accumulated in the past.
The history has seen many deficits of US budget to give place to surpluses reducing the state debt. For instance, by the end of 1930s – till the mid-1940s America faced large deficits of federal budget due to manifold military expenditure increase. The debt was constantly on the rise. It was 16, 6% of GDP in 1930 growing to 52, 2% in 1940 and went up to record high 121, 2 % in 1946. The post-war surpluses allowed to gradually reduce the debt to 94% in 1950, 56% in 1960 and 37, 6% in 1970.
By the end of 1960s America entered the era of deficits. It was provoked by the Vietnam War and great increase of military spending. With Ronald Reagan in the White House the US switched over to the new economic policy called later «Reaganomics». It was based on US debt growth. To compare, the US debt was $909 billion in 1980 to get up to 3206 in 1990, it expanded 3, 5 times.
The relative growth was from 33, 4% up to 55, 9% of GDP. Some peers did scrupulous research to show there was no economic growth at the time. The official GDP growth statistics are actually a total bluff. The figures are not related to the increase of production and services but rather to the growth of consumption. It’s all about the goods and services that America gets by getting loans from other countries.
America had only four budget surpluses in the last 45 years. It took place during the Clinton years in 1998, 1999, 2000 and 2001. Then there was a period of no debt increase, relatively (but not in absolute terms) it even went down a bit. For instance, it was 58% in 2000 and 57, 4% in 2001.
The last dozen of years has seen a great leap upward. In absolute terms the debt was $5, 77 trillion in 2001 to increase to $15, 14 trillion in 2011 having grown by 2, 6 times. In relative terms the debt grew from 57, 4% up to 100% of GDP. During the George W. Bush, Jr, and Barack Obama tenures the economy got addicted to loans for good and all having lost any stimulus for progress.
In the summer of 2001 some reasonable Republicans insisted that the rise of debt ceiling to $2, 5 trillion should be connected to the condition that envisioned the reduction of the total budget expenditure by the same sum during the period of time the ceiling was in force. It was a condition to be adhered to by the administration and the supporting Democrats. The administration reneged on the promise to exacerbate the stand-off at the Capitol Hill this October.
Some believe it is not possible to reduce or even freeze the US debt anymore. But it is not true. The annual federal budget deficit regularly exceeded $1 trillion. Roughly, the figure is equal to one third of federal budget. It means the one third reduction is needed to reach a balanced budget, no new loans asked and granted. The calculations adduced by experts show it is quite achievable.
This goal can be reached without going through a «technical default». It’s a pity no options aimed at getting America out of the budget and financial crisis have been debated neither on the Capitol Hill, nor by US media. But experts are well aware of the options available: a) the increase of taxes, b) the reduction of state expenditure; c) covering the deficit with the help of monetary emission by the Treasury (issuing treasury notes).
The majority of US congressmen have a very short memory. They don’t even remember the laws that have come into effect recently. First of all, it’s the Gramm-Rudman-Hollings Balanced Budget and Emergency Deficit Control Act of 1985 (Gramm—Rudman—Hollings Act).
It imposed binding constraint on federal spending up to 1998. Allowable deficit levels were calculated for the eventual elimination of the federal deficit. If the budget exceeded the allowable deficit, across-the-board cuts were required. It was amended by the Omnibus Budget Reconciliation Act of 1993. The law is still in force, but somehow nobody remembers about it today.
Demonstrating the political will, the President and the Congress could not only freeze the debt growth but even start to reduce it. There have been enough precedents in the US history to prove the point. One was the absolute reduction of national debt after WWII. There is even more impressive example that took place in the 1830s.
President Andrew Jackson was an ardent opponent of the idea to create a central bank of the USA. He has gone down in history as the president who closed the central bank that existed those days. Aside from that, he also took resolute measures to bring down the national debt to zero. His name is not frequently mentioned in the United States today.
Actually the American national hero is under an information blockade, though the history of his fight against bankers could explain to Americans a lot about what is happening at the Capitol Hill in 2013. Now it is clear why some options are on the table while others are swept under the rug when it comes to debating the ways out of the financial-banking crisis.
The answer is simple: the reconciliatory compromise just approved by US Congress is a decision taken under the pressure exerted by the Federal Reserve System. The national debt is an effective instrument used by financial tycoons to control the President, the administration and the elected representatives of the people.
Valentin KATASONOV | Strategic Culture Foundation