Why Congress should vote no on raising the debt ceiling

April 13, 2011

By Christopher Whalen
The opinions expressed are his own.

“A spectre is haunting Europe — the spectre of communism. All the powers of old Europe have entered into a holy alliance to exorcise this spectre: Pope and Tsar, Metternich and Guizot, French Radicals and German police-spies.”

–Karl Marx – Friedrich Engels
The Communist Manifesto

There is a specter haunting the industrial nations, too — the specter of debt default and deflation. All of the powers of the post-WWII regime of neo-Keynesian economic management have entered into a holy alliance to exorcise this specter: Fed Chairman Bernanke, European Central Bank Head Jean-Claude Trichet, Democrats in the American Congress and the German centrist tendency under Angela Merkel.

All of these champions of the status quo ante are, ironically enough, serving as agents for the bond holders of the largest US and EU banks, the clients of PIMCO, Black Rock and even my friend David Kotok at Cumberland Advisors. These agents of the global creditor class are betting on the likes of Bernanke, Trichet and Merkel to collect their debts for them like so many China gunboats — and thereby plunge hundreds of millions of people into penury for decades to come.

It is no small irony that the interests of the banks and bond holders in the US are being protected by a Democrat from Chicago named Barack Obama. Far from being a leftist, Obama is a global technocrat who turned out to be the most perfectly compliant stooge for the interests of the large banks and institutional investors. With Timothy Geithner at Treasury and former JPMorgan banker William Daley at the White House, the only decision Obama needs to make every day is what shirt to wear.

On Capitol Hill, however, the long slumbering Republicans are starting to discover the political power of fiscal sobriety. In the negotiations with the White House over the budget for fiscal 2011, House Speaker John Boehner (R-OH) managed to win some significant concessions from the White House on spending issues — even if entitlements and military spending were off the table this time around. The next and more important fight comes over the question of raising the US debt ceiling. Once again, President Obama is not even in the game.

Secretary Geithner and his boss, JP Morgan Chase CEO Jaime Dimon, have made clear their distaste for a fight over extending the debt ceiling, in part because a debt default by the US would end the pretense of “too big to fail.” If Washington is willing to contemplate a default by the US Treasury, who cares about the fortress balance sheet of JP Morgan and other US zombie banks? But for a number of reasons, democratically elected governments from Lisbon to Dublin to Washington need to begin the process of financial restructuring whether the banks like it or not. And all of the political servants of the banksters are doing their best to avoid debt write downs.

In Ireland, for example, the new government of Fine Gael leader Enda Kenny is in a struggle with Trichet and his vile contemporaries at the ECB. The Euro central bank is essentially trying to keep together an under-funded bailout of the continent’s corporate and bank debts at the expense of public taxpayers. So muted is the political discourse in Western Europe that people are barely protesting — at least not yet. But offering Ireland the choice of default or decades of deflation and unemployment to repay its foreign obligations at par is untenable and risks comparisons with the German war reparations after WWI.

The Kenny government should reject the self-serving advice of the German-dominated ECB as well as the technocrats inside Ireland’s finance ministry, and tell Angela Merkel and French President Nicholas Sarkozy to try harder. Specifically, if the ECB and the core nations of the EU are not willing to offer Ireland more generous terms to bail out the private debts of EU banks, then the Kenny government should take the example of the people of Iceland and tell the technocrats in Brussels an emphatic “no” to bailing in the Irish bank debt at public expense.

Frankly, if you weigh the trade off between the immediate cash flow benefit to Ireland of walking away from its foreign debt and being cut off from the global capital markets, as Trichet has threatened to Kenny, a default seems the obvious choice. And with Portugal and other “peripheral” states of the EU tottering, the Kenny government has more leverage than it knows. Putting a gun to the head of Trichet right about now and daring him to blink might prove a very satisfying experience for any Irish officials with the guts to play the hand God has dealt to them.

In Washington as well, some Republicans are starting to appreciate that saying no to more debt and devaluation a la the Paul Krugman school of economic mismanagement is good politics. It is wrong to call Krugman and his ilk “Keynesians.” Lord Keynes was neither an apologist for debt or inflation, nor was he a free trader. He valued strong national industry and financial markets that were only supplemented by global capital and trade flows. What would Keynes tell Ireland today?

For the same reasons that the Kenny government needs to impose haircuts on Ireland’s creditors, the US Congress needs to vote no on the debt ceiling increase as part of a larger shift in thinking on debt and spending in Congress. Just as the people of Iceland have done the right thing by saying no to repaying corporate debts of UK and Dutch banks (all of which are now nationalized naturally), Americans need to take a page from the history books and begin the actual process of default on all manner of debt and entitlements obligations.

The only way we can force our citizens and also our trading partners to talk about the economic issues that are driving America’s growing mountain of debt is to stop adding to the pile. The role of the dollar as the primary means of exchange for global commerce and finance are the twin evils at the heart of the US fiscal disease. The role of the dollar as the world’s “reserve currency” is likewise a terrible millstone around the necks of American workers.

Saying “no” on raising the debt ceiling is the way for deficit hawks in Congress in both parties to seize the fiscal agenda and start a long overdue conversation about America’s place in the world. As I wrote in my book, Inflated: How Money and Debt Built the American Dream, this discussion must include an end to the dollar as the primary global means of exchange. When the dollar ceases to be the global currency, then the Fed can no longer monetize deficits with impunity as today.

One way of forcing this adjustment process is to start imposing losses on holders of dollar debt. Painful as it will be, helping the world to readjust the level of debt in the industrial nations back to realistic levels and rebalance the global currency markets into a peer-to-peer framework is a necessary process if America is ever to achieve a sustainable economic model. The only question is when and where will emerge the political leadership to do the right thing and begin to actively restructure debts.

Barack Obama has already failed that test of leadership by studiously avoiding any response to the US real estate meltdown, but new leaders in many heavily indebted nations will face the same issues — chronic levels of debt that will only grow heavier as and when global interest rates rise. If the ECB manages to bully Prime Minister Kenny in Ireland, do they really expect a more malleable regime after the next election?

The looming threat of debt is why we should expect to see a majority of Republicans and perhaps more than a few Democrats in Congress seek to block any increase in the US debt ceiling unless the measure includes a balanced budget amendment to the US Constitution.

My view is that Congress should vote down any debt ceiling measure unless President Obama agrees to sign the balanced budget amendment. Even if Secretary Geithner has to run the US government on cash, like the good people of Iceland and Ireland today, it will be a good thing for America’s political debate to default — at least for a few weeks. Then people will know that the once unthinkable is very possible.


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/


Posted by sookytwo | Report as abusive

Ridiculous and disappointing. There may be an idea here, but it’s weighed down with far too many insults.

Posted by e_lundy99 | Report as abusive

Wow. Bravo. Lucid, informed, on target, and posted in the main stream too.

Posted by NorCal-Kevin | Report as abusive

Military/defense spending = untouchable, as do Medicare/social security. Therefore Rep = Dem, and the ceiling will assuredly rise

Posted by auger | Report as abusive

Congress handed over the economic reins to the financiers as quickly as they could when things got broken during the Big Financial Belly Flop. The same major problem exist now as then: Neither Party has the moral courage to make the long-term compromises necessary to correct the economic malaise that is becoming systemic and endemic to the US economy. The Parties will have to work together (HAHAHAHA) if they want to regain the fiscal discipline over the economy usurped by the financial industry and neither party is willing to make that long-term commitment to the American People. You are looking in the wrong place if you are looking for financial salvation in the US Congress – to hell with them before and to hell with them now ..

Posted by Woltmann | Report as abusive

A lot of good, solid points brought up here, but as for Americans there is no divide over the responsibility for the challenges we currently face. And President Barack Obama, although he ought to have really reformed the banking system instead of allowing Congress to just feed the behemoth and present reform with nonething more than a makeover, didn’t create, ignore or exacerbate the issue America’s debt problem. Contrary, to popular opinion, we have held true to our democratic ideal by electing and re-electing members to Congress who pander tour own self interests, and they’ve obligingly made promises that future generations will have to grapple with. Guess the future is now. Republicans and Democrats, left and right and the great majority of the citizens in between are complicit in our current state of affairs. HOWEVER, the sudden “panic” is well overblown. There are adult discussions to be had, tough choices to make and thoughtful ideas to be executed.

Posted by beagles08 | Report as abusive

Who are Larry Summers, Robert Rubin, Ben Bernanke and Tim Geitner? These crooks have been running the US treasury since the 80s like wolves guarding a henhouse.

A privatized central bank called the Federal Reserve (created by the Federal Reserve Act of 1913) charges the US taxpayer interest to loan our government money. This money could be created by the US Treasury interest free. Why pay a privately owned bank to this?

BTW the IRS was also created in 1913. Ironically…do to deficit spending, the majority of all federal income tax goes to pay the interest owed to the Federal Reserve, The constitution says that congress is in charge of the US monetary system.

We need to demand congress repeal the Federal Reserve Act and put the US Treasury back in charge printing money and setting interest rates

UNDERSTAND, The Fed charter could easily be repealed by Congress. Don’t support presidents that are puppets to the Federal Reserve and the Big Banks!

In 2010, over 300 hundred members of congress voted to Audit the Federal Reserve. The bill was killed in Committee by Barney Frank. A full audit in 2011 can help give our country back to the people! Support a full audit of the Federal Reserve, contact your Congressmen now!

Posted by cutter77 | Report as abusive

“the US Congress needs to vote no on the debt ceiling increase”

I totally agree.

The rest of this essay is rubbish. Obama not a leftist?! Obama is a total progressive, liberal, socialist, marxist, leftist. The author i suspect is just covering for his own leftism, but lets face reality: the whole progressive movement is just a stalking horse for big bank debt – the whole liberal spend spend spend (on democratic constituents) for the common good is in reality just a way to encourage society to take on endless debt from the banks. Its about money, and the bottomless democratic need to spend money we dont have is really just the need of their banker masters need to have society take on endless debt to fill their coffers with endless interest payments.

Posted by Steve_Bennett | Report as abusive

Chris is absolutely right, the correct way to fix this problem is not “devaluation”, which is just money printing, but actual partial default. At this point it is disingenuous for dollar holders to ask us to believe they expect to get “real value” back for their dollar holdings. Once a partial default is credibly introduced, people will be surprised at how quickly the realignment and restoration of growth could be. But the default must be large enough to clear the excessive debt overhang.

Posted by Fazsha | Report as abusive

While you may be perfectly right that a limited default would ultimately serve everyone’s interests, that is not going to happen via failing to raise the debt limit — nor should it, as such an action would throw the financial world into chaos, unless the parameters of default had been set well in advance.

Further, I feel certain that no U.S. politician will support bringing an end to the current system of monetizing debt. Isn’t that like asking someone to cut the floor out from under their very own feet? Only international action can force any country to handle its finances more responsibly.

Did you speak up when the Bush II administration started accumulating these huge debts? It was clear within the first year of Bush II’s Presidency that he was bankrupting the country. Where were you then?

Posted by Ralphooo | Report as abusive

Wait a second, are you saying that all citizens should default on every loan and payment owed by them. immediately. Are you asking every company in your accounts receivable file to stop paying you because its easier than paying you? My guess you are holding, what are they called shorts? Only a Banker would advocate misery for hundreds of millions for a profit. Bankers, first up against the wall when the revolution comes.

Posted by waywrdchld | Report as abusive

So we default on our debts? That’s what you are saying. Any idea at all how that will affect the global economy. Didn’t think so.

Posted by colonelP | Report as abusive

I find it disappointing that Reuters would publish such a trite and hypocritical commentary on such an important issue. The suggestion that the government should switch in mid-course to a cash budget is utterly absurd for one. For another, the ideological bias of the author’s opinions demonstrates profound ignorance of the intricacies of central banking. The interrelation of inflation, interest rates, exchange rates, liquidity, and economic growth are far too complex to be dismissed as a conspiracy.

But above all, the idea that Americans will have to work like slaves to pay off the national debt to angry Chinese is both comical and utterly fictitious. The worst case scenario in the far future if we were to amass unrepayable amounts of debt is no worse than the author is proposing as the solution in the present day – default. So why default today when we can default tomorrow? This makes no sense.

Posted by prometheo | Report as abusive