Budget, Economy, Issues

How Trump can use the 100-year old debt ceiling to get control of the $20 trillion debt

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Since 2000, the nearly $20 trillion national debt has exploded, growing a whopping 7.7 percent a year.

But nominally — prior to adjusting for inflation — the U.S. economy has only grown at an average annual 3.94 percent rate.

If those trends persist during the Trump administration, the debt could be $37 trillion by the time President Donald Trump hypothetically leaves office after the 2024 election campaign.

By then, the debt to GDP ratio — now 106 percent — could grow dramatically, to 142 percent: $36.7 trillion debt to a $25.8 trillion economy.

After 20 years of excessive borrowing — all but guaranteed as Baby Boomers fully receive their Social Security, Medicare and Medicaid benefits — the national debt would be $93 trillion.

Image Credit: NY CC by SA 3.0

Image Credit: NY CC by SA 3.0

And if the economy continues at its current anemic rate, the GDP would only be $40 trillion — a debt to GDP ratio of 232 percent.

If that happens, Trump will almost have certainly failed to get the U.S. economy moving again. In a very short span of time, the U.S. could be left with a debt that can never possibly be repaid.

Surely, robust economic growth is a large part of the solution, but fiscally, with automatic spending taking up a larger and larger share of the total federal budget each year — $2.7 trillion of so-called “mandatory” spending takes up 68.9 percent of the $3.9 trillion budget — there is almost no brakes on federal spending.

That is, except for the debt ceiling. Established in 1917 as the U.S. entered World War I to control excessive borrowing, in recent years — with notable exceptions in the late 1990s and in 2011 — has been something of a rubber stamp by Congress.

As a result, the national debt has increased every single year since 1957.

More often than not, the threat of default, created by the debt ceiling, has been used, not to control spending, but to justify perpetually expanding it. Usually when the borrowing limit comes up, and Congress overwhelmingly passes legislation raising it significantly — with the threat of default looming over the proceedings.

But Trump could change that, by demanding legislation that would remove the threat of default from the equation by prioritizing payments in the event the debt ceiling is reached, including interest owed on the debt, Social Security, Medicare, active duty military payments, defense spending and veterans’ benefits, and other essential spending.

No matter how good a deal-maker President Trump is, he should recognize that when the rules of negotiation do not favor the U.S. — then it’s time to change the rules on behalf of American taxpayers.

That would give future presidents and Congresses a stronger hand in debt ceiling negotiations to impose spending cuts without risking any default — which are absolutely needed to get the budget on a more sustainable trajectory and avoid the rising risks of default over the long term.

Already, the U.S. ability to refinance the debt is in question.

Since 2007, the Federal Reserve’s horde of U.S. treasuries has rising from $790.8 billion to $2.5 trillion today — an outright monetization of the national debt that occurred after the financial crisis. Another $1.77 trillion was printed to purchase mortgage-backed securities.

That is just default by another name. And just a taste of what will come if the interest rates should rise dramatically and the U.S. cannot publicly auction its debt.

To avoid such national shame again in the future, Trump can take control of the debt today. But until the debt ceiling is reformed to mandate prioritization of payments, removing the threat of default, the spenders in Washington, D.C. will always have the upper hand in that debate.

This is a guest post by Robert Romano senior editor of Americans for Limited Government.

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