According to US law, there is a limit on the amount of debt that the US government can take on. This debt ceiling is set by Congress, which has the sole authority in all matters of the budget and finances. Since the debt ceiling was first set, in 1917, it has been increased by Congress about 100 times, usually without noise, but sometimes after loud and public struggles.
About two weeks ago, Janet Yellen, the US Treasury Secretary, announced that Washington had reached the debt ceiling, which stands at just under $31.4 trillion. If Congress does not raise the ceiling, Yellen warned, the funds in the federal government’s coffers will run out, and it will not be able to finance its expenses, including obligations related to the bonds issued by it in the past. In response, Kevin McCarthy, the new Speaker of the House of Representatives, announced that there will be no increase in the debt ceiling without real cuts in federal government spending. “We will not give up in any way,” stated a key member of Congress Another, although everyone knows that if the debt ceiling is not increased, the federal government could become insolvent on its debts. But for Kevin McCarthy, the newly elected Republican chairman from California, who was barely elected after 15 rounds of voting and by a small majority (216 to 212), very little leeway. In order to be elected, he had to submit to the most extreme fringes of the Republican Party, and to agree, among other things, that a motion to impeach him would be put to a vote even if submitted by only one member.
Kevin McCarthy, Speaker of the US Congress / Photo: Associated Press, Andrew Harnik
Trump has proven that eliminating the debt is a difficult task
The demands to reduce the debt and balance the budget are not new. During Obama’s presidency, the streets of America were filled with members of “The Tea Party” (a play on words referring to the Boston Tea Party, which is considered the event that started the American War of Independence). The protesters demanded budget cuts and a small government. The movement and its members stood Largely behind the great Republican successes in the midterm elections in 2010, after which a faction within the Republican Party, numbering 52 members of Congress, called itself the “Tea Party Group” arose in the House of Representatives.
Former US President, Donald Trump / Photo: Associated Press, Gerald Herbert
The “Tea Party” movement did decline with the end of Obama’s term, but it was the basis of the popular movement that lifted Trump to victory in the primaries, and later in the presidential election. Following the spirit of the movement, Trump promised during the 2016 election campaign that he would “raise the national debt (then in the region of 19 trillion dollars) within 8 years of his term”. In an interview with the Washington Post, candidate Trump said that he plans to renegotiate various deals with foreign countries, and the new negotiations and agreements will create cash balances that will lead to the lowering of the debt and its elimination. But big words and actions. When Trump entered the White House, the national debt stood at The US is at 19.95 trillion dollars, by the time he leaves four years later it will have grown to over 27 trillion – the third highest growth, in relation to GDP, of all US presidents in history. It also included budget deficits of over 2.5 trillion dollars in the years before the corona outbreak.
Republicans will not cut wherever possible
Since the constitution states that all powers in financial matters are vested in Congress and that “no money shall be withdrawn from the treasury without legislation determining its purpose”, the budget must be passed by legislation. It is not a single piece of legislation, but a number of budget and taxation laws, usually 12 in number, which are passed in sections and parts throughout the year. The budget itself is divided into two parts: one is called “non-discretionary” and it includes the expenses and payments that the government is already obligated to Existing laws – mainly the expenses for the National Insurance payments as well as health insurance for residents over the age of 65 (Medicare). The second part of the budget is called “Discretionary” and it is discussed and passed by the finance committees of the House of Representatives and the Senate.
In 2022, for example, the non-discretionary part occupied almost 64% of the total American budget. The discretionary portion was only about 29% and the balance was the interest payments on the government’s debts. The total budget deficit for 2022 was approximately $1.4 trillion, an amount that was added to the government debt that exceeded the $31 trillion mark. Of the amount that was “discretionary” (as mentioned only about 30% of the total budget), almost 50% was directed to the defense budget (about 800 billion dollars), the rest of the amount was spent on dozens of sections, programs and government agencies.
For example, the Ministry of Justice, which also includes the FBI, will be budgeted at about 35 billion dollars (about 0.5% of the total budget), the Ministry of Energy will be budgeted at about 46 billion dollars, the Ministry of Internal Security at about 52 billion, and so on. These expenses were offset by revenues of 4.2 trillion for the US government. About half of the revenues come from income tax. Payments to National Insurance and medical insurance for retirement brought in about 1.5 trillion (about 35%), corporate taxes contributed about 371 billion (9%) and the balance from of various taxes and duties.
From the analysis of the budget, it appears that the only section with the potential for real cuts is the defense budget, as mentioned about 800 billion dollars in 2022. But even in the Republican Party itself, the one that demands the cut, many members of Congress oppose reducing the defense budget. This position is consistent with the traditional view of Republicans who have always been in favor of strengthening America’s military power and increasing budgets for the Department of Defense.
The numbers speak for themselves. The federal government has little room for significant changes within the existing rules of the game. Even if the administration agrees to a horizontal cut of 10% in the budget that is “at discretion”, only about 165 billion dollars will be cut. The total budget will change by only 2.5%, the deficit will decrease by barely 11%, and the debt by less than half a percent. The statements and threats of the new Speaker of the House of Representatives that he will not approve the increase in the debt ceiling – even at the price of closing down the government’s activities and including non-payment of its debts – is nothing but harmful political noise. Moreover, it is doubtful whether within his own faction in Congress he is able to produce a sensible budget The faction members will agree on him.
Talk will not solve the problem of deficits and debt. The federal deficit and debt will only expand in the coming years as ten thousand more Americans turn 65 every day, and their life expectancy is getting longer.
A snowball that could reach beyond the US
According to the Congressional Budget Office’s end-2022 analysis of long-term trends in the federal budget, government deficits are expected to triple over the next thirty years. From about 4% of GNP in 2022 to about 11% of it in 2050. These deficits will cause the government debt to continue to double or more in terms of GNP. This is on the assumption that there will be someone who will purchase this debt, and it will not simply be financed by indirect printing, purchases by the Federal Reserve – just like in Japan, where the central bank holds over 45% of the government debt, which is 268% of GNP.
This continued increase in government debt will have real and profound effects on the economy over time. According to the estimate of the Ministry of Budgets, the increase in debt will increase credit costs throughout the length and breadth of the American economy, it will also cause a decrease in private investments, and in any case will reduce the rate of growth in the economy over time. Over time, the risk of a deep financial crisis will also increase, if lenders lose confidence in the government’s ability to repay its debts, or pay the interest on them. All this may, according to the Ministry of Budgets, also lead to a sharp fall in the value of the dollar when the international markets lose confidence in it. This process could flood America with more dollars, while the trillions currently in world markets return home.
The Americans are strongly opposed to the solution
It seems that there is no way out of the path of deficits and the endless debt, without taking care of the expenses for the national insurance and the health programs. But any such attempt is a political minefield with far-reaching dangers, social in general and personal for politicians in particular. President Bush learned this firsthand in 2005, when he presented a fundamental plan for comprehensive reform of the National Insurance, in an attempt to prevent the institution from going bankrupt and falling under the yoke of future generations. The presentation of the program was accompanied by the president in a series of public appearances, with the aim of selling it to the public and Congress, but the members of the house from both factions refused to buy. By the end of that year, America and the White House were neck-deep in the disaster of Hurricane Katrina that devastated New Orleans, and the initiative faded into silence.
The opposition of the politicians from wall to wall to talk even about reform, is not incomprehensible considering the public opinion. According to a survey by Pio Research from 2019, approximately 74% of Americans (regardless of age group) oppose the idea of any cut in the National Insurance payments, the number rises to 80% when it comes to those fifty and older. These positions are not surprising when approximately 55% of retirees rely on National Insurance payments as a major source of their income and another 34% rely on them as a secondary source, according to a Gallup survey from last year. Numbers that are also supported by other surveys.
In the US, all members of Congress are elected directly and personally in the constituencies of their countries. Often the races are decided by the margin of a few percent or less. Under these circumstances, it is clear that behind the big talk about budget cuts and the debt ceiling, there is nothing but populism, since any real cut It is not possible without actual damage to the National Insurance and the medical insurance, and this is strongly opposed by the absolute majority of the voters.
What is the difference between a rolling deficit and a Ponzi scheme?
A Ponzi scam, named after an inventor who was a small-time crook from the beginning of the last century, is an event in which guaranteed and impossible returns are made to first investors, from the money of the new investors. By this definition, financing the government deficit with ever-increasing debt, both in time and amount, becomes too much like a giant Ponzi scheme. However, unlike the actions of Bernie Madoff, who perpetrated the largest Ponzi fraud in history, this fraud is not done in secret and is not limited to only a few tens of billions. This is the story of the world economy in the year 2023. The only question that remains open is if and when the “2008 moment” will occur for the countries’ crippling debts, and the pension promises that depend on them? Or maybe some miracle in the years to come will prevent the seemingly inevitable.