We all know that there is no real debt limit because what is called a debt limit never actually limits the debt. It’s a farce that works like a bunch of alcoholics who write laws to enforce drinking limits, and when a limit is reached, they do a farcical negotiation that temporarily eliminates the limit which allows them to have the next drinking binge until they reach the next limit at which time they go through the next farcical negotiation and continue to binge. I gather that this is the 79th farcical negotiation that has taken place.

Not only does this tragically comical ritual lead most people to be confident that the debt limit will be gotten around, but it also tells us that those running our political system lack discipline or they tacitly agree that binge borrowing is OK. I think it makes clear that the long-term prognosis is for the debt bingeing to go on until a crisis ends this dynamic. However, most people seem comforted that the debt limit won’t trigger a debt default and don’t worry about the debt bingeing continuing. That raises the justifiable questions: Is it a good or bad thing that we are getting around this debt limit? Are high debt levels and high levels of new borrowings that require high levels of government selling of debt assets not risky? I think those are reasonable questions as we have been hearing warnings of a debt Armageddon for decades yet none has occurred. 

About three weeks ago I put out a report that was the first of a two-part examination of the mechanics of debt. The first part is about the money-credit-debt-market-economic mechanics and the cycles they create. It explains in simple terms how I believe the mechanics work. In it I describe how both the short-term and long-term cycles work, most importantly the interactions between borrower-debtors, lender-creditors, and central bankers, and the consequences these interactions have on markets and economies.

I think we need to talk about the mechanics of what has happened and what will determine where we are probably headed. Doing that before we express our views about what’s happening and what is likely to happen is essential. It’s nonsensical to talk about what is happening and what is likely to happen without first agreeing on how the mechanics work. We can’t possibly answer such basic and important questions as whether the government can continue to accumulate debt in large amounts without facing bad consequences, and if there are going to be bad consequences, what they will look like and what will bring them about, without first knowing how the mechanics work.

By the way, the mechanics are pretty simple because the finances of countries’ governments work the same as the finances of individuals and organizations, except governments have the abilities to 1) print money and 2) take money from some people and give it to others. How this works is particularly important now because the US government (and people) are deeply in debt and need to spend on many things such as taking care of those who don’t have enough to pay for the basics, like supports for children in poverty, education, infrastructure, defense, climate remediation initiatives, mental and physical health initiatives, supports for other countries, etc. Because money and debt are not limited, those who make the decisions on how much to spend on what don’t look at how much money they have to spend and then prioritize what they should spend it on. They instead decide how much they want to spend and then decide whether they will get it from taxes (which is hard because people fight to keep their money) or borrow it, and if they borrow it, they have to decide whether they sell it to lender-creditors who want it or sell it to central banks who print the money to buy it. What they do and why is critical to understand for those who set policies as well as for those who are affected by them, so I look forward to our continued exploration of how the machine works and what it is most likely to produce.

PS: In Part 2, which I’m working on now, I will give a quick review of how the mechanics described in Part 1 have played out from 1945 (the beginning of the US and US dollar world order) until now, and take a look into the future. 

https://www.linkedin.com/pulse/farce-consequences-debt-limit-ray-dalio/