As you likely know by now, the U.S. government has agreed on a debt ceiling agreement that will avoid the default of the USA. Let me just begin by saying that the media’s coverage of this debate has been absurd and embarrassing. I have yet to see one accurate portrayal of the actual situation. But nothing has been more absurd than the political circus that has erupted over the course of the last few weeks. It’s embarrassing and every single one of our representatives should be ashamed of themselves for allowing this conversation to even reach this point.
As of Sunday evening futures are up almost 200 points and everyone thinks some great crisis has been averted. Last week I predicted this exact scenario to a tee:
“We’re running right up against the debt ceiling deadline and the two sides don’t look like they’re ready to agree on anything. The Boehner plan is going to go up for vote on Thursday according to the latest reports, but Obama has already said he’ll veto it. So, there’s some potential that we get a “mini TARP” in the next few days where markets continue to tumble as the politicians prove they are serious about deciding to let America go bankrupt.
Then, when push comes to shove, they’ll “work all weekend” (those hard workers in Congress!) and we’ll get some sort of incredible rescue announcement at the last hour on Sunday evening. Futures soar 200 points and everyone breathes a big sigh of relief as our politicians ride off into the sunset on their white horses….”
Now, let’s have the discussion that really matters here and ignore all of these politicians who are shaking each other’s hands and celebrating this grand “achievement” of theirs.
What actually matters:
THE USA IS THE SUPPLIER OF U.S. DOLLARS. THE DEBT OF THE U.S.A. IS DENOMINATED ENTIRELY IN A CURRENCY THAT IT CAN PRINT AT WILL. THIS MEANS THERE IS NO SUCH THING AS THE U.S.A. BEING ABLE TO “RUN OUT OF MONEY” OR DEFAULT IN A TRADITIONAL SENSE LIKE A HOUSEHOLD, STATE, BUSINESS OR EUROPEAN NATION CAN (THESE ARE ALL CURRENCY USERS AND NOT ISSUERS). THE DEBT CEILING IS ENTIRELY SELF IMPOSED AND NOTHING MORE THAN A POLITICAL TOOL. IT IS ABSURD TO RATE THE CREDIT OR AN AUTONOMOUS CURRENCY ISSUER LIKE THE UNITED STATES. THE DEBT CEILING IS A RELIC OF THE GOLD STANDARD THAT SERVES NO PURPOSE TODAY. TONIGHT, PRESIDENT OBAMA SAID WE “AVOIDED A DEFAULT”. NO, WE AVOIDED A SELF IMPOSED DEFAULT. THERE IS NO SUCH THING AS THE U.S.A. RUNNING OUT OF U.S. DOLLARS AND NOT BEING ABLE TO MEET ITS OBLIGATIONS. THE LEADER OF THIS COUNTRY UNEQUIVOCALLY DOES NOT UNDERSTAND HOW OUR MONETARY SYSTEM WORKS AND HIS ADVISERS AND THE OTHER CONGRESSIONAL REPRESENTATIVES ARE LARGELY TO BLAME FOR THE CURRENT ECONOMIC DEBACLE. VOTERS SHOULD BE OUTRAGED BY THIS IGNORANCE.
What the debt ceiling agreement actually means:
The U.S. economy remains mired in a balance sheet recession. This means that the private sector remains too weak to run with the baton as they pay down their excessive debts from the debt bubble of the last 10 years. By accounting identity, the USA, as a current account deficit country cannot grow its economy with a very weak private sector and a government that isn’t spending sufficiently. In other words, the foreign sector, private sector and government sector cannot all stop spending at the same time. Someone must be a net spender.
During a balance sheet recession, if the government does not cover the balance of the current account deficit then the economy is very likely to contract. This debt ceiling agreement means that austerity is likely to continue gripping the U.S. economy and even though the Republicans did not entirely steamroll President Obama (make no mistake, he got bullied like a schoolyard child in these debates and rolled over like a dog) they have essentially succeeded in convincing the President that cuts are what is now needed.
The bottom line:
These unfounded fears of becoming the next Greece means we are increasingly becoming the next Japan. The debt ceiling debate does not matter at all. The agreement did not save anything. All it does is increase the risks of a weaker economy in the coming 12 months.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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