Dancing on the (Debt) Ceiling

As of the end of June, the United States’ Public Debt was a whopping $14.46-trillion, representing about 98.6% of our total Gross Domestic Product last year. In other words, in 2010, every man, woman, child and corporate entity that produced and contributed to the output of American business generated about 1% more than what we owed to everyone else in the world. 

A sobering statistic.

Today, the eggheads at Moody’s, which rates the US’ credit worthiness, made the stunning pronouncement that the best way to counter all the angst over holding firm or raising the federal debt ceiling would simply be to do away with the notion all together. Forget changing the rules and regs—just eliminate the rulebook altogether. 

Yeah, that’s healthy.

Does eliminating the debt ceiling make it easier or more difficult to rate America’s credit worthiness? If we were to eliminate such constraints tomorrow, thus removing the Congressionally-arbitrary line in the economic sand, would the US government continue to spend like drunken sailors--or start spending like mindless zombies? 

How could we tell the difference?

Did I just offend zombies?

Would Moody’s have an easier time rating our creditworthiness thus? Would it still not be apparent that we were indebted to a level near 100% of our ability to produce? A debt ratio is a debt ratio; every credit manager knows this—although there were many recently who chose to ignore this fundamental fact of fiscal life.

I’m wondering what Wall Street’s game really is, at this point. The ratings agencies are weary of the anxiety when the debt ceiling is reached, and government demand dictates more borrowing is needed. (There's a clue hidden in that pile.)  

Of course, these are the same math mental giants that brought you the credit default swap debacle and the resulting credit implosion and economic malaise. Some of these Mensa’s are now running the US Treasury. 

No wonder we’re in trouble.

There is one condition under which I would advocate for abolishing the debt ceiling—which really is an arbitrary, meaningless number—and that would be replacing it with a mandatory debt ratio. In essence, the Federal Government would be constrained from borrowing by the same tangible boundaries of which you and I are subject.

Want to borrow some money?

What’s your ability to pay it back? 

Income to debt ratio is a good indicator of this for we private sector geese, and should be good for the government gander, too.

What’s that? 

The government can print its own money? 

Don’t confuse the issue with esoteric economic facts—that’s why we’re in this mess to begin with. Too much economic theory, not enough fiscal pragmatism.

Regardless of the metric we use to measure America’s credit worthiness, we’re nowhere near Gold-plated, Platinum-dipped, Triple-A status when we’ve borrowed 98.6% of what we made last year. Mull that, Moody’s.