Beyond the Debt Ceiling: the Death Spiral

But if investors lose confidence in the federal government (which they should have by now) and the interest on the debt rose to an average of 10% (admittedly higher than it has been yet), the scenario of the death spiral would occur at $14.5 trillion dollars.

That is right. A death spiral is possible, if enough investors lose confidence, at below the current $16.7 trillion debt limit.

So where the real debt limit lies depends on where real investors, as a group, draw the line.

It would be interesting to ask a few people like Janet Yellen, Ben Bernanke, Lawrence Summers, Barack Obama, Jacob Lew and John Boehner exactly what they think the real debt limit is.

Even the GAO thinks "Debt held by the public at these high levels could limit the federal government's flexibility to address emerging issues and unforeseen challenges such as another economic downturn or large-scale natural disaster. Furthermore, in both the Baseline Extended and Alternative simulations, debt held by the public continues to grow as a share of GDP in the coming decades, indicating that the federal government remains on an unsustainable long-term fiscal path." [GAO Long Term Outlook]

I predict we are in for stormy fiscal weather. Today the government pays interest at a rate from practically zero on short term notes to 3.75% on 30 year bonds. I believe the Federal Reserve has gone to great lengths to keep interest rates low not just because that encourages an economic recovery, but because it puts off the day of reckoning on the real cost of the national debt.

The Republicans are right, we need to cut spending. But we have to cut spending in a way that minimized the hurt to both people and the economy. That means cutting subsidies to the rich, the upper middle class, and in particular military spending and foreign aid. But the Republicans want to cut payments for seniors and the poor.

The Democrats are right, we need more revenue, which means more taxes. We need a higher tax rate on people earning more than $50 million per year and on large inheritances. We need to close every loophole. We need to legalize and tax "street" drugs. But tax increases do result in less spending and less capital deployment, so they should be reasonable. And the Democrats, too, have been reluctant to cut military spending.

The American economy has been badly hurt by both parties and both branches of Congress and by the President these past few years. By protecting their turfs, including the Pentagon budget, they are weakening the long-term viability of the United States.

Both parties should agree to balance the budget in fiscal 2015 and start paying down the national debt in fiscal 2016. The pain will be shared by everyone, but to the extent it can be targeted by law, it should be dished out to those who have benefited most from the American economy.