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What if Foreign Creditors Impose a “Lending Ceiling?”

What if Foreign Creditors Impose a “Lending Ceiling?”

As the level of Federal debt approaches its ever increasing “ceiling,” currently set at $7.4 trillion, the real danger is not that Congress fails to raise the limit, but that it succeeds. The whole charade is a joke. After all, what’s the point of having a ceiling if every time the government hits it, Congress raises it?

Tomorrow we get the release of the August trade deficit, the largest component of America’s ever widening current account deficit, which at its current rate, requires foreigners to loan Americans $1.8 billion a day. Without raising the debt limit, theoretically the U.S. government will not legally be permitted to borrow any of it.

Fundamentally America’s enormous current account imbalance is fueled by excessive borrowing and consumption and insufficient savings and production. Therefore any meaningful correction would require less of the former and more of the latter. However, as the U.S. economy is more than 70% consumption, a much needed current account adjustment can not occur without a severe recession. However, the government and the Fed are determined to fight off any recession with more stimuli aimed at encouraging even more borrowing and consumption.

Properly understood, the recession, as unpleasant as it many be, is the cure, while the current credit and consumption driven “growth” is the disease. Since the cure involves severe economic pain, no politician or partisan central banker, wants it administered on his watch. So like a junkie determined to postpone withdrawal, policy makers shoot the economy up with another “fix” every time the high starts to fade.

As is the case with many harmful addictions, there is a tendency among the infected to resist the cure. In fact, the symptoms are so intoxicating, that those “suffering” refuse to admit they’re sick. Unfortunately, the longer the necessary adjustments are postponed, the greater the imbalances grow, and the more painful their ultimate resolution becomes. In a worst-case scenario, the longer a cure is postponed, the greater the chance that the patient dies. If the “patient??? is the U.S. economy, then the economic equivalent of death would be hyperinflation, a phenomenon which would leave the U.S. dollar practically worthless.

The only way to prevent this outcome is to allow the recession to unfold, without any government “stimulus,” to interfere with the corrective process (other than deregulation and reduced government spending, which would ease the transition costs of going from a consumption to a production economy). The greatest danger is that the recession is delayed too long, and the dollar’s value is reduced to nothing.

In the mean time, the media can continue focusing attention on the phony crises concerning the government’s potential failure to raise the debt “ceiling,” an event which unfortunately has a zero probability of occurring, while ignoring the real impending crises, the one where America’s foreign creditors finally establish their own version of a “lending ceiling.”

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