As we step into the New Year, there is a sense of renewal and hope. The chance for a fresh start beckons, yet the remnants of past decisions linger, reminding us of the hurdles we still face.
Regrettably, simply flipping the calendar won’t erase the missteps of yesteryear. Like unpaid bills, our past mistakes remain to be confronted.
In the realms of finance and politics, central authorities in Congress, the U.S. Treasury, and the Federal Reserve have left a trail of costly errors. Generations of deficit spending and currency devaluation have accumulated, akin to trash piling up during a workers’ strike.
These issues won’t simply vanish.
While many Americans embraced the festive season, Treasury Secretary Janet Yellen quietly dispatched a letter. This communication was likely overlooked by the majority.
In her December 27 letter to House Speaker Mike Johnson, she provided a subtle warning regarding the fallout from previous errors. Specifically, the Treasury anticipates reaching the statutory debt limit between January 14 and January 23.
Following this, the Treasury will implement extraordinary measures to ensure the continuity of government operations and entitlement benefits. These actions are essential to avoid defaulting on obligations such as Social Security, Medicare, military salaries, and interest payments on the national debt.
Such extraordinary measures might include reallocating funds from the civil service retirement account. Once the debt ceiling is elevated, these funds can be replenished through new debt issuance. Other possible measures can involve furloughing federal employees.
These tactics provide Congress with a temporary respite to negotiate a debt ceiling agreement. However, this scenario sets the stage for a contentious debate over how much spending will need to be reduced in exchange for raising the limit.
Preserving Confidence in Credit
In her letter, Yellen, who will leave her position at the Treasury on January 20 – the day of inauguration – urged Congress to act “to protect the full faith and credit of the United States.”
The meaning behind Yellen’s phrase, “full faith and credit of the United States,” remains ambiguous. It seems she is advocating for Congress to raise the debt ceiling, allowing the Treasury to continue issuing IOUs that the U.S. government may never fulfill.
The debt limit, often called the debt ceiling, marks the maximum amount the U.S. government can borrow to meet existing financial commitments, including Social Security, Medicare, and military compensation.
Debating the increase of the statutory debt limit appears fruitless. Manipulating the civil service retirement funds and furloughing workers may only defer the inevitable. The reality is that the funds have already been utilized.
It’s important to remember that the Treasury is not the entity that authorized the spending initially. It did not fail to balance the budget, nor did it set the unrealistic debt ceiling. These actions originate entirely from Congress.
Yellen’s letter serves as a reminder that the time to rein in spending is before funds are allocated—not after.
As one of his initial acts as President, Trump may feel compelled to pressure Congress into raising the debt ceiling so that existing obligations can be met. However, how does this truly address the need for spending control?
For decades, Congress has shown a consistent inability to balance the budget.
One alternative could be to allow the spending to surpass the debt ceiling, letting the public experience firsthand what happens when government checks start bouncing.
Taking Action Over Words
It is essential to clarify that the debt ceiling is a legislative cap set by Congress—not the Treasury. The ceiling has no correlation with the government’s budget, which is also determined by Congress.
Congress tends to spend as though tomorrow doesn’t exist. Over generations, it has burdened the nation with expansive spending programs that are beyond the government’s capacity to sustain. Additionally, Congress is responsible for tax deductions and credits that diminish tax revenues, all in a misguided attempt to shape the economy to follow its flawed ideals.
The frequent need to elevate the debt ceiling allows the Treasury to finance the spending commitments that Congress has already made, highlighting the absurdity of the situation.
The existence of the debt ceiling is questionable—not because we believe the Treasury should operate unchecked, but because, as currently applied, it is merely a relic of Congressional failures.
If Congress were to embrace its duty and produce a balanced budget, the Treasury wouldn’t be in its current predicament. This would eliminate the need for theatrics and allow focus on more pressing issues, like addressing the vast number of dependencies on government support.
The ongoing saga of needing to raise the debt ceiling not only entertains but also reveals the stark political landscape. The urgent requirement for a rise within the early stages of Trump’s presidency will clarify the challenges ahead.
Trump 2.0 has articulated a commitment to manage government expenditure effectively. But will there be tangible actions that reflect this intent?
Will there be substantial cuts to government spending? Or will it continue the trend of borrowing and spending seen since the Eisenhower era?
The Reality of DOGE
The venture led by the DODGE proponents—Elon Musk and Vivek Ramaswamy—has made bold promises to slash $2 trillion from the budget.
However, their role is limited to identifying areas where expenditures can be reduced. They cannot implement actual funding cuts—this authority resides with Congress.
As of January 20, Republicans will control the House, but with only a slim majority. Some members favor deep cuts, while others prefer to maintain the funding flow.
Any proposal from Speaker Johnson to raise the debt ceiling must find a middle ground between excessive reductions and insufficient cuts to gain approval.
This complexity makes it unlikely that DOGE will achieve its ambitious spending cut target of $2 trillion.
In Washington, the standard operating procedure favors debt and growing deficits, leading to repeated hikes in the debt ceiling. This cycle has persisted for decades, fostering a culture of dependency.
For example, in the last 90 years, a considerable portion of the populace has relied on government expenditure programs for their livelihoods, including individuals on Social Security, Medicare beneficiaries, defense contractors, welfare recipients, and many others.
If Trump, Musk, and Ramaswamy can indeed compel Congress to enact a balanced budget, it would signify a remarkable political achievement. However, the chances of this occurring are virtually non-existent.
Ultimately, after much drama, the debt ceiling will likely be raised once more. Some minor cuts may be implemented, and Congress will commend itself for its efforts.
Nevertheless, these measures will be superficial and insufficient to balance the budget or initiate a strategy for debt repayment.
Consequently, when Trump’s term concludes, the national debt is projected to soar past $50 trillion.
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Sincerely,
MN Gordon
for Economic Prism
