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Pragmatic Capitalism

Capital for Living a More Practical Life

Yes, Getting Rid of the Debt Ceiling is Smart

There are reports going around this morning that Trump wants to eliminate the debt ceiling. Here’s what I said about this 5 years ago:

As a fully autonomous currency issuer the US government has no legitimate limit in its ability to finance its own spending. There is no such thing as the USA not being able to make a debt payment (see here if you’re already confused) due to a lack of funding since it can tap its own Central Bank for funds. But for some reason we have enacted a law that binds Congress by the “debt ceiling”. The debt ceiling is a misguided law for several reasons:

  • The debt ceiling is only reached when past spending results in current debt bumping up against the debt ceiling. This is like eating a full meal and then tying your stomach in a knot after the fact so you can’t digest the food you already decided to eat. It makes no sense.
  • Congress needs to be constrained in its spending.  But is debt the right target?  No. The USA, as an autonomous currency issuer can never “run out of money” or fail to make a debt payment. The debt ceiling imposes a fake limit on what the US government can actually spend as it implies some sort of funding constraint. This is misguided as it risks self imposed default due to political ignorance.
  • The true constraint for an autonomous currency issuer is always inflation. Congress should enact a process by which we measure the effect of spending on overall living standards and adjust policy accordingly. We should not have a debt ceiling. If anything, we should have an inflation ceiling.

The best way to get around the perpetual debt ceiling concerns? Just eliminate it. The law makes no sense anyhow and does not apply to our monetary system. There’s no need for us to keep having recurring “debt ceiling crises” just because policy makers have failed to update the legal system to match our evolving monetary system.

Getting rid of the debt ceiling is a good idea. Every 6 months or so we run into this silly self imposed limit, nearly default and then raise the limit some more so we can go through the same charade later. It makes no sense. And no, I am not saying that Congress should have an unconstrained limit to its spending, but this is not the way this should be done. We should be appropriating funds through Congress BEFORE we decide we do or do not want to finance that spending. If Congress wants to limit spending then stop appropriating the funds before they need to be financed. This is basic financial management. Congress needs to stop acting like they care about the national debt when their spending clearly shows that they don’t. This charade, which occurs after the fact, is just a political show and it should stop.

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