The fuss about the debt ceiling

By Farrokh Langdana, Director, Executive MBA Program & Professor of Finance and Economics

Faculty Blog: macrobuddies.blogspot.com

 

The whole issue is a red herring. It is a dangerous distraction that takes away from the fact that the US budget deficit is nonsustainable and that we are shamefully monetizing our debt (printing money), euphemistically known as QE2 - if you note, we detected this in 2008 when my EMBA class called it a "stealth monetization."

The extension of the debt ceiling is tantamount to an individual with a severe eating disorder. The patient is very overweight. The solution? To let out his pants and to loosen his belt! That would be the equivalent of relaxing the debt ceiling.

The real issue is profligate spending and unless across-the-board and brutal spending cuts are not made (along the lines of Gramm-Rudman in the 1980s), we will risk everything. No tax hikes are needed, as they will collapse confidence and retard growth, but uniform and proportional across-the-board spending cuts must be enacted soon.

What should Obama do?

Treat Americans like adults. Tell us the bad news a la Churchill ("I can promise you nothing but blood toil and sweat"). Tell us that the for the next two years we will have our backs against the wall.  That the whole world is watching how we do. That it is our kids against the Chinese and Indian kids that will decide the outcome of all this based on future technology and innovation.  

In other words, it is time for us Americans to finally shake-off our complacency and, to once again, bring this country back from the brink.