Imagine you have a financially irresponsible brother-in-law. He’s not a ne’er-do-well, as he and your sister make good money, but he spends more than they make. He’s been doing it for years, and he’s deeply in debt to you and your other siblings, who’ve been lending him about 5 or 10 percent of his annual income each year to maintain his lifestyle.
He’s superficially responsible about it, signing a note for each new loan and making interest and balloon payments when they are due, but every year he’s back, asking for a loan larger than the payments he has to make next year. His debt has mounted up over the years to five times his annual income.
He’s recently come on hard times and their family income has been reduced by 20 percent. Nevertheless, he has new plans to increase his annual spending by 20 percent of his previous high income, permanently, so that this year he wants a loan of 40 percent of that previous high. His debt soon will exceed six times his annual income and will continue rising.
Then, his wife puts her foot down. In a family meeting with him and with her brothers and sisters, she tells him that he must change his profligate ways immediately or she won’t co-sign any note for any purpose other than extending the loans already in place. However, if he is willing to promise to cut his planned annual spending increase to 10 percent of their previous high income in each of the next 10 years, she will co-sign for a 30 percent loan this year.
He turns red and stamps his feet. He storms out of the room, and then he returns. He blusters threateningly, “I can’t cut back on spending! I won’t! If you won’t let us borrow more, you will force us to default on the notes, destroying our credit rating!”
What’s your reaction to your sister’s proposal? Most likely, as a creditor you think, “Well! It’s not perfect, but it’s about time.”
What’s your reaction, again as creditor, to his threat to destroy their credit? You probably think “How could their credit rating be worse? Everyone in town, especially the family, knows how deep in debt they are. Her proposal to stop digging the debt hole deeper is the best thing for that. He is effectively saying ‘I’ll make sure you won’t want to loan to us again,’ while she is saying ‘I won’t let you lend us any more than we already owe.’ It’s not difficult to see who is acting responsibly. It would be better if she were in charge of the family’s finances.”
Allow me to spell out this little allegory for you. Your fiscally irresponsible brother-in-law represents Uncle Sugar, the United States of America, including all Congresses and all presidents who ran up the debt; except that Uncle Sugar is percentagewise worse off than your sister and her husband, and maybe a little less moral. After all, your brother-in-law doesn’t try to fix his problem by stealing from the high earners down the street.
Your sister represents the current Republican majority in the House of Representatives of the 112th Congress led by John Boehner and Eric Cantor, and you and your other siblings are the holders of the U.S. Treasury securities.
Your sister’s threat to her husband is the House threatening not to raise the debt ceiling. Her requirement for him to reduce future spending in exchange for her agreement to more borrowing is the same as the House Republicans’ requirement that the president and the Senate Democrats agree to $2.5 trillion dollars of cuts in spending over the next 10 years in order for the House to agree to a debt ceiling increase of the same size.
Your brother-in-law’s threat to destroy his family’s credit is the same as President Obama’s and Treasury Secretary Timothy Geithner’s threat to default on the debt by spending tax revenues on everything but debt service. It’s just not true that default is the only option if the debt ceiling isn’t raised.
What about your thought that it would be better if your sister were in charge of their finances? Perhaps that is the holders of U.S. Treasury securities recognizing that a fixed debt ceiling is probably a good thing. After all, if a fixed debt ceiling frightens creditors so much, why do they insist on fixed credit limits on credit cards?
Or perhaps it’s most of us thinking that January 20, 2013, can’t get here soon enough.
