US Economy: Our Government Plays A High Stakes Poker Game On Our Debt Ceiling
“I’m all in”, I clamored, demanding everyone’s attention with my stern tone…
That was the last thing I remember saying before I skulked away from the final table.
Unfortunately, your seat in the game usually disappears when you speak those words. And this time was no different.
I thought I had it won. I had weighed the odds and the statistics were in my favor. I thought, my pocket Kings with no Ace on the board, would hold up. And on the river, you know what had to show up.
It’s Karma. If you are a card player, then you’ve experienced this phenomenon. I’m sure you’ll agree.
As the Ace of Diamonds hit the felt, I had a flush of blood enter my hands and cheeks. And then there was that tingling sensation at the base of my skull. My entire brain almost went numb.
How did this happen? How did I get beat? “Unbelievable”, I said to myself in my head. Or maybe I blurted it out loud…
It was the end of my great run in a high stakes poker tournament…
I had managed to make it all the way to the final table in this particular event at the Borgata. They host an annual World Poker Tour event, and I decided to step up and see what I could do.
I’ve always wanted to get on TV in one of these events. My hope was to show the world that not every poker player is a reckless, stupid kid that wears their hat sideways. And maybe pocket a big check too…
It reminds me of what’s happening in America right now. We are close to “all in” here in the US, playing games with our debt ceiling. And it puts us at risk for severe economic crisis.
Let me explain…
It seems we’re playing a high stakes game of poker with our Federal budget. And the players at this particular final table are President Obama, the Republicans, and the Democrats. They’re all battling to see who will come out on top…
No one has called all in, just yet.
While it seems each player has made some excessively large bets, no one has put all their chips down. For example, earlier this year Obama opened with a bloated budget that begged for a “re-raise” by the Republicans.
And on cue, Republican House Budget Committee Chairman Paul Ryan “re-raised” Obama’s initial “bet”. He put forward an aggressive, record cost slashing budget which would unlikely be passed as written.
In true partisan fashion, Obama responded to “negotiate” on raising the debt ceiling while cutting some Federal spending. But he also slammed Paul Ryan, and his budget, while stating we need to raise taxes on the rich.
It’s just one big poker game right now and we’re on the verge of getting nothing accomplished.
But the reality is they’re playing with global financial stability.
Here’s what I mean…
You’ve probably heard the term “debt ceiling” but may not know how it will impact us if we can’t maintain it. If you weren’t aware, it’s been in place since 1917 when the Second Liberty Bond Act was passed by Congress.
The government needs to ensure the national debt does not cross this solid line. If it happens, we could default on our debt and interest rates could soar. The results could cause global financial panic.
It also could mean less foreign investment in US debt securities. Crossing the debt ceiling means we can’t issue any more treasury debt (bonds). And this could create a situation where the US Dollar would lose its reserve currency status!
What’s scary is Treasury officials say the government will hit the current $14.3 trillion limit by May 16, just weeks away!
The Republicans are fighting hard to get spending under control, but in the end I bet we’ll do what we’ve always done. Simply comply and raise the roof.
Below is a chart of how often and by how much we’ve raised the debt ceiling. It’s obvious we have a drunken sailor’s approach to spending…
| Date of Change | Debt Ceiling ($ In Billions) |
Change ($ In Billions) |
| August 9, 1990 | 3,195 | +72.3 |
| October 28, 1990 | 3,230 | +35 |
| November 5, 1990 | 4,145 | +915 |
| April 6, 1993 | 4,370 | +225 |
| August 10, 1993 | 4,900 | +530 |
| March 29, 1996 | 5,500 | +600 |
| August 5, 1997 | 5,950 | +450 |
| June 11, 2002 | 6,400 | +450 |
| May 27, 2003 | 7,384 | +984 |
| November 16, 2004 | 8,184 | +800 |
| March 20, 2006 | 8,965 | +781 |
| September 29, 2007 | 9,815 | +850 |
| June 5, 2008 | 10,615 | +800 |
| October 3, 2008 | 11,315 | +700 |
| February 17, 2009 | 12,104 | +789 |
| December 24, 2009 | 12,394 | +290 |
| February 12, 2010 | 14,294 | +1,900 |
My problem with this chart is we simply can’t afford to raise the roof any further. Our GDP is only $14.7 trillion. We’ll be at 100% of GDP with the very next increase in our debt ceiling.
Simply put, the USA will be 100% in debt. How can an economy sustain itself like this?
It can’t. And economists have testified to Congress exactly this point. Carmen Reinhart, noted international economist, stated in her testimony to the US Senate in February 2010:
“Our main finding is that across both advanced countries and emerging markets, high debt/GDP levels (90 percent and above) are associated with notably lower growth outcomes.”
We are well beyond the 90% mark here. And for proof of how it affects a country, simply look at the data provided by the IMF.
Here are the numbers from the P.I.I.G.S. nations. Remember these guys? They caused the European debt crisis which tanked world markets.
Country: Debt As A Percentage Of GDP
- Portugal: 97%
- Italy: 130%
- Ireland: 93%
- Greece: 130%
- Spain: 74%
At 100% debt to GDP, we aren’t any better than the “rogue nations” we pointed the finger at during the debt crisis. And until we can make meaningful spending cuts, we will continue along the path to lower growth and may just have our own debt crisis looming.
Until this high stakes poker game over our economy ends, we will pay in the form of a depressed dollar and near worthless government debt.
Category: Bonds
