I have to tell you that – as a former international merchant banker – I want to laugh out loud when I hear the dire predictions of how the United States will have to default if Congress doesn't raise the nation's debt ceiling.
With a little Wall Street-style creative financing – even when the government's outstanding debt level reaches the official limit of $14.3 trillion sometime around the end of March – there's no reason why the country can't go on borrowing as if nothing has changed.
The debt-ceiling debate is something you're going to hear a lot about in the days and weeks to come. The Obama administration just yesterday (Monday) introduced its fiscal 2012 budget proposal – a spending plan that's certain to ignite a firestorm of debate between Democrats and Republicans. And those arguments about next year's spending plan will absolutely feed into a heated showdown over the federal debt ceiling.
But the two sides are arguing about the wrong thing: It's the country's debt load – not the debt ceiling – that has to be addressed. And I can prove it to you.
Like a consumer who's in over his head, Uncle Sam has several alternatives available before his creditors arrive to repossess his vehicles and cut up his credit card. By highlighting some of the "debt dodges" that are available, I will show you that the dire near-term predictions aren't anything to fear. Long-term, however, this country really does need to slash its debt-load. But that requires a real commitment, not political maneuvering.
U.S. President Barack Obama yesterday introduced his $3.7 trillion budget plan for fiscal 2012, in which he aims to cut the federal deficit to $1.1 trillion next year. The spending plan will jump-start a debt-ceiling debate that's been underway since late last year.
Back in January, U.S. Treasury Secretary Timothy Geithner urged lawmakers to raise the $14.29 trillion debt limit – or risk a government default that would spark "catastrophic economic consequences that would last for decades." In an appearance on Friday, Geithner said it's "essential" for Congress to raise the debt ceiling if the United States is to maintain investor confidence.
Republicans have been calling for deep – and specific – spending cuts in exchange for raising the debt limit. But Geithner said the debt ceiling should not be used as a bargaining chip.
Get ready to watch a major political battle.
But the debt-ceiling debate is just so unnecessary. In the long run, the American taxpayer would be better served by having the Inside-the-Beltway crowd make a real attempt to slash the federal debt load.
In fact, should anyone down in Washington wish to ring me up, I could demonstrate three easy ways to sidestep the debt ceiling – freezing the debt-ceiling debate in its tracks by proving that this looming confrontation is nothing but additional political theater.
Let's look at each of my three debt-ceiling "solutions."
Debt-Ceiling Debate Breakers
Sale and Leaseback: This well-known technique is used by retail chains all over the world. So why not put it into effect on a much grander scale? After all, the United States has some pretty fancy assets, and can raise money by selling them. Naturally, it would not want to lose the use of, say, the White House, or the Smithsonian Institution (with contents), so it would lease the assets back, probably for a very long term.
When the lease runs out – say, in 2061 – America's Chinese creditors would have the right to take over the White House. But, hey, that's business. Needless to say, for such prestigious assets, the U.S. government could extract a premium price. The White House, after all, isn't just another 10,000-square-foot McMansion with a helipad: It has a fantastic view of the Washington Monument and the Lincoln Memorial Reflecting Pool, worth a premium to any self-respecting billionaire buyer.
The only pity is that the United States can't play the ultimate trick with out-of-town buyers by selling them the Brooklyn Bridge – the New York City Department of Transportation owns that.
Subprime Debt: Once the U.S. government has sold and leased back all the assets for which it can find a convenient market, it can roll out a second Wall Street financing technique – the subprime mortgage. Since Fannie Mae (OTC: FNMA) and Freddie Mac (OTC: FMCKO) are technically not part of the government, mortgages guaranteed by Fannie and Freddie don't count as public debt. Hence if the Department of Defense (DoD) wants to buy a new bomber, it sets up a Special Purpose Vehicle (yes, another Wall Street dodge) to own the bomber, then finances it through a mortgage guaranteed by Fannie or Freddie.
You may ask: Why subprime? Surely, the Department of Defense, as an agency of the U.S. government, can be trusted to pay its debts? True, but there's a small problem: Fannie and Freddie are only supposed to lend against housing.
No worries – Wall Street has a solution to this, too: It's called the "no-docs (no-documents) loan." (It also has another name: the "liar loan.")
Back in 2006, a borrower using a no-docs loan to a $700,000 house did not have to note that he was doing so without a job.
Similarly, this time around, the DoD won't have to declare that the asset being financed is a stealth bomber, not a house. To add verisimilitude, instead of naming the bomber "Enola Gay" or "Memphis Belle" or something equally authentic, the DoD can name the aircraft "31 Acacia Avenue" – and perhaps paint its nose a tasteful shade of pastel green. That way, the subprime mortgage that finances it will have just as much reality as the typical subprime loan of 2006 – and a rather better chance of getting repaid, if the Department of Defense comes into some money somewhere along the way.
Quantitative Easing: If Wall Street techniques prove themselves insufficient, the government can still sidestep the debt-ceiling debate by employing some "Bernanke-esque" tactics. Under the second round of quantitative easing, aptly referred to as "QE2," the U.S. Federal Reserve and Chairman Ben S. Bernanke are creating $75 billion each month and using it to buy $75 billion of medium- and long-term U.S. Treasury bonds. That, in itself, does not get around the debt-ceiling limits – the government still has to create the Treasury bonds to sell them to Bernanke.
However, the actual existence of the Treasury bonds is essentially superfluous. Bernanke can achieve exactly the same monetary effect, without the annoying necessity of creating Treasury bonds and blowing through the debt ceiling, by printing $75 billion worth of $100 bills each month – and then driving them ‘round to the U.S. Treasury building in a truck, where "Turbo Tim" Geithner can unload them and use them to pay bills.
It would be quite a trucking job, mind you: $1 million in $100 bills weighs 22 pounds, so $75 billion would weigh 750 tons – roughly 20 full truckloads. That's not an impossible quantity: The deliveries could be made daily, though the times would have to be staggered to foil hijackers.
In any case, this operation, while cumbersome, would represent absolutely no change in monetary policy from what the federal government is currently doing now.
The Uncle Sam Sham
It might be argued that the Wall Street and Bernanke-financing techniques described herein are thoroughly unsound, and are bound to lead to ruin.
But so are the monetary and fiscal policies that the government is right now pursuing.
And anyone who wants proof can just look at the fact that the next big Capitol Hill fracas – after the one focusing on President Obama's budget plan for the new fiscal year – will be a debt-ceiling debate. Instead of all this wheel-spinning and political grandstanding, what the administration and both parties in Congress should be focusing on is the serious long-term budget adjustments and spending cuts that need to be made if this country is to regain its former strength and position of leadership in the global marketplace.
The debt-ceiling debate is shaping up to be Washington's Waterloo moment: It's the debt load – not the debt ceiling – that matters and that must be addressed.
Given how easily a massive debt load can crush the finances (and future) of the person, company or government that has to endure it, it's clear to me that the time to attack and slash those trillions in federal debt is now – not later.
Indeed, this may well be our last chance to do so.
As an active investor, you have only one question to ask yourself: Why wouldn't I want a guy like that on my side? Well, now you can do just that. With Hutchinson's "Merchant Banker's Alert" advisory service, you can benefit from the financial acumen of the former global merchant banker who's made the afore-mentioned market calls, and who's even given entire governments financial advice. To find out how to put Hutchinson on your side, please click here.]
News and Related Story Links:
- Money Morning Special Report:
An Open Letter to Washington: How to Slash the Federal Budget Deficit and Save the U.S. Economy.
- Money Morning Special Report:
State of the Union: Why You Should Fear America's "Sputnik Moment."
- The Merchant Banker's Alert:
- Money Morning Investment Research:
How to Beat the Looming Inflation Tsunami.
- Money Morning News Archive:
Three Budget Reality Checks.
- Bloomberg News:
Geithner Says ‘Essential' for Congress to Raise Debt Ceiling.
- The New York Times:
Both Sides Are Braced for a Debt-Limit Debate.
- Politics Daily:
Obama Budget Due Monday as Debate Nears on Raising Debt Ceiling.
- The Washington Post:
Raise debt limit to avoid national catastrophe, Geithner warns Congress.
No-Doc Mortgages Are Back.
- The Smithsonian:
- A View on Cities:
The Brooklyn Bridge.
- National Park Service:
The Washington Monument.
The Reflecting Pool.
- Yahoo! Answers:
- Memphis Belle Memorial Association:
- Smithsonian National Air and Space Museum:
The Enola Gay.
TurboTax is No Defense, Sir!
- Money Morning News Archive:
News Stories About QE2.