Spending cuts, tax increases, or both? How's the debt ceiling debate going to work out?

[Mark Fitzpatrick]

With the specter of a US default growing over this debt ceiling issue, how do you think all this is going to work out? Republicans are firmly against tax increases and want steep spending cuts, but Democrats want tax increases and are resistant to steep spending cuts. Republicans also don't want to raise the debt ceiling unless it is accompanied by steep spending cuts. Democrats want to raise the debt ceiling right away.

Both Moody's and Fitch have warned of debt downgrades if Congress doesn't come to an agreement, which could have serious ramifications in the financial markets and push up interest rates. Chinese ratings agency Dagong is saying the US is "already defaulting" by printing money to inflate away our debt.

How do you think this is all going to turn out? Though Speaker Boehner has been holding a hard line on the spending cuts issue as a condition for approving a debt ceiling increase, I think he'll cave on it.

[Mitch Kronowit]

This is like telling your credit card company that even though you've maxed out your account, they had better raise your credit limit or you'll stop making the minimum payments. That wouldn't fly with Visa or Amex, but here is the government trying to extort money once again from the American taxpayer.

And I really wish everybody would stop using the phrase "printing money". The United States is NOT post WW I Germany and we do NOT create our money in the mints, but at the Federal Reserve.

The US mints only print paper money and stamp out metal coins to meet the demand of people who need or want to hold cold hard cash, e.g., ATM visitors, video arcade patrons, drug traffickers, etc. In fact, I believe only about 25-35% of the US money supply exists in the form of paper currency and loose change. The rest of the "money" is nothing more than a bookkeeping entry at the Federal Reserve banks. THAT is where money is created (and destroyed), not the mint.

For some perspective on all this "doom and gloom" regarding our increasing money supply, look at this recent graph of the M-2 supply (used for forecasting inflation).

As you can clearly see, the M-2 supply is growing in a nice steady linear fashion (gray area), not skyrocketing off the chart. One thing that is probably keeping our money supply in check is the tight-fisted approach banks are taking towards lending. Since every dollar on deposit MAY ultimately result in an increase of $10 in the money supply, it has the potential for explosion, but not until the banks start loosening up the purse-strings and getting the money in circulation. So no need to panic... yet! :wink: