To the Limit, and Beyond

Really ... what's the point in having a limit if it is routinely raised when it is about to be reached? That's not really a limit at all, is it? That's more like just a number that increases over time. Limits are intended to stop something. As Merriam-Webster would have you believe, a limit is "something that bounds, restrains, or confines".

For example, a speed limit is supposed to stop people from driving faster than a certain speed. Most drivers observe this limit, or what they infer to be a more reasonable and still "mostly" legal limit of the posted rate plus six or eight miles per hour.

This system works fairly well.

Credit card limits work fairly well also. For example, the credit requested on presentation of an Amex card is either granted or declined based on where the new total indebtedness falls relative to the previously established limit. You can always ask your credit card issuer to raise your limit - sometimes this works, sometimes it doesn't.

But, what is one to discern from the Federal Government "debt limit" in recent years?

It was last raised in November 2004 from $7.4 trillion to $8.2 trillion dollars. Today, Treasury Secretary John Snow has alerted Congress that we are expected to finish spending this newly borrowed $800 billion by mid-February, and the limit once again must be raised.

At some point you've got to wonder who's going to start whittling down the outstanding balance on this debt.



OK, we all know the standard answer to that question ...

It also makes you wonder about that $317 billion budget deficit that many were crowing about a few months back - a 22 percent reduction in the fiscal 2005 budget? That doesn't square very well with new borrowing of $800 billion in 15 months. Some of the answers to this riddle were discussed in these pages some time ago when we had Fun with the Public Debt.

Raising the debt limit has become routine. It's as if you make minimum payments on your credit card every month, and then when you reach your limit, you call the credit card company and ask them to raise your limit.

And, they do!

About once a year - year after year after year. The outstanding balance continues to go up, with little or no payments toward the principle, but new credit is extended.

Of course it helps when you own a printing press. This way, the debt can be "monetized", which is a fancy way of saying that the Federal Reserve buys U.S. Government debt with money printed "out of thin air".

This is, at times, very convenient.

Recently, our Asian trading partners have purchased so much or our debt that "monetizing the debt" by the Federal Reserve has not been required as much as in the past.

Where do they get the money to buy U.S. debt?

This is "extra" money that they have laying around, apparently. A "surplus" of savings is what they call it. But our trading partners also own printing presses, and many of them fix their currencies to ours, so it seems that they have to operate their printing press each time hard-working Asian businessmen want to exchange U.S. dollars for their local currency.

Printing presses ...

In some ways, owning a home is kind of like owning a printing press.

As long as home prices continue to go up, you can always borrow against your house to make ends meet - to perpetuate a lifestyle that you really can't afford.

In an odd sort of way, this is much like borrowing money from Asian trading partners who are content with debasing their currency at a rate equivalent to the rate that you are debasing your own currency.

As long as the trading relationship continues, you can always borrow from your trading partners to makes ends meet - to perpetuate a lifestyle that you really can't afford.