The Debt Ceiling: Why the Government Should Say "No"

Warren Buffet recently commented that not raising the debt ceiling would be "asinine". The only thing that's asinine though is his comment. He is wrong.

First off, like many of the other phrases the government creates, the phrase "debt ceiling" is a total misnomer. The word "ceiling" implies a definitive upper boundary which, when established, is not changed. The ceiling of a house is created and once created is not changed. Thus, by the US government establishes an upper limit or "ceiling" establishing how much money they are allowed to spend, you would think that once this upper limit is created then it cannot be raised. Wrong - the debt ceiling has been raised several times in the past decade. I would argue that if the debt "ceiling" is continually being raised, then why establish a ceiling? It doesn't make sense to have a ceiling if it is continually being raised.

Raising the debt ceiling is the wrong approach to America's financial state. The US dollar is currently dropping when measured against all other currencies, including the Swiss Franc, the Chinese RMB, the Australian Dollar, the Canadian Dollar, and the European Euro. If the US dollar was not measured against the Euro then the US dollar would look much worse, since the Europeans have their own financial troubles which have made their currency weak. A weak US dollar, contrary to what the media may say, is bad for the US consumer. A weakening US dollar means each dollar has less purchasing power then it previously did, so the same dollar dollar buys you less as the currency weakens. Why, though, is the US dollar dropping against all other currencies? Because of US fiscal policy.

Why has the US dollar been weakening against all other foreign currencies? Well, the Federal Reserve has been allowed by the US govt to purchase large amounts of US Treasuries. This is the Quantitative Easing you hear about in the media. "Quantitative Easing" is another phrase fabricated for the US govt to disguise what it really is - it is actually monetizing debt. The Federal Reserve is printing money to buy up US debt. What this is doing is increasing the money supply drastically. When money supply is increased, the value of each unit of money decreases since there is more money in the supply. This is why we are seeing the US dollar fall against other major currencies. This is not to say that other countries' central banks are not also increasing their money supply - there other other countries doing the same thing. However, the United States is doing it at a much larger scale then other countries: the United States central bank is being more reckless.

By not allowing the US debt ceiling to raise, the Federal Reserve's debt monetization program will also be capped. To the US consumer, this is what is needed. When the value of our money falls, it means the price of goods increases. This is what we are seeing today! A gallon of gas has surpassed $4 a gallon in most states. The price of coffee has doubled in the past six months. The price of commodities, including gold, silver and copper, have all been increasing. This is the last thing the US consumer needs, is for the things they purchase on a regular basis like food and energy to continue increasing.

By capping the US debt ceiling the US government will show they are serious about at least thinking about the US debt levels and also interested in helping the US consumer. I however have serious doubts that the government will vote to prevent an increase in the debt ceiling based on their behavior since they have been in elected.