Conservatives should hit the ceiling

By Jill S. Farrell 
web posted November 22, 2004

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 (http://www.freecongress.org/).

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