Judging Freedom - Lies They_re Telling You About the Debt Ceiling - Ryan McMaken

Episode Date: June 1, 2023

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Hi, everyone. Judge Andrew Napolitano here with Judging Freedom. Today is Thursday, June 1st, 2023. It's about 4.30 in the afternoon here on the East Coast of the United States. Ryan McMakin, our guru on economic matters, past, present, and future, from the Mises Institute in Auburn, Alabama, joins us again. Ryan, it's always a pleasure, my dear friend. Welcome back here. Thank you. It's great to be with you. Thank you. So you wrote extensively on the – you have written extensively on the issue of debt. You wrote a great piece on the history of debt before the

House of Representatives, Republican-controlled as it is, caved and gave Joe Biden unlimited, assuming the Senate goes along with it, borrowing power. Let's start out with some of the basics. Why is it that you disbelieve Republicans in the Congress when they claim that they're in favor of austerity? Well, certainly history doesn't support their claim that they'll get the job done and that they're conscientiously devoted to cutting back federal spending. And we can just see that if we just look at the federal spending numbers going back many decades. It certainly wasn't true under Nixon or, and even less true under Ford. Reagan expanded spending considerably. And then we really started to

see the wheels come off with George W. Bush and with Trump, where both those presidents, above and beyond anything you might have even expected based on previous experience, just expanded spending amazingly. There was a time when the Republican Party claimed that it stood for austerity and spending within budgetary limits. I don't even know if they claim that now. You've actually been quite charitable in your nice summary of them. But they're in lockstep with the Democrats on everything from war to the welfare state to the national security state, to spending.

And we saw that in the vote yesterday. One of the things that they screamed about in the days and weeks leading up to the vote is that the U.S. government has never defaulted and we can't let it default again. Well, that's not true at all, is it? That's right. It's just a straight up lie. Surely they know they're lying at this point. And you don't even have to go that far back in history to find cases of default. We can certainly find cases of default. We go back to the founding generations and the early years after the war. Country was broke, said we won't pay our debts for 10 years, clearly a default. And then there was a default

during the Civil War when they issued the greenbacks in 1862 and failed to make good on those contracts. But then in the 20th century, one of the most egregious defaults was when the feds just said they weren't going to pay back their liberty bonds in gold, like it said in the contracts that they had borrowed money. The lenders said, we'll give you this money in exchange for payback convertible to gold. And then when FDR decided, oh, we're off the gold standard, he said, too bad. We're not going to make good on what we said we were going to pay. So that was clearly a default right there. They didn't pay what they said they were going to pay. And then there was a mini default in the late 70s where some argue there was a glitch.

But at any rate, the Fed screwed up and didn't pay off their creditors. And the Feds were immediately sued for breach of contract. And of course, interest rates then shot up as a result. And then there's just the ongoing issue of inflating the value of the money away is a sort of default in itself. I mean, the heavens don't fall when the feds default, do they? No, interest rates go up. That's what happens when governments default. And also, it doesn't mean a total repudiation of the debt. We could be talking about, oh, we'll pay it back 90 cents on the dollar, that sort of

thing. And even in that case, then you would still have plenty of investors that would still see U.S. bonds as a more reliable and safe investment than in a lot of other countries' bonds. So what will happen on June 5th, Monday, if for some reason the Senate does not go along with or passes a bill with amendments to it and it has to go back to the House and this thing doesn't have an agreement and the president's signature on it by Monday. Monday is the day that Janet Yellen has been saying the sky's going to fall. Nothing's going to fall, nothing's going to fall. No, in this case, there's no reason to believe there would be even a default because the Treasury and past Treasury secretaries have already made it explicitly clear that, oh, we'll just reprioritize where the money goes and we'll just find the money and we'll pay off our creditors first.

Now, what that means then is that there would then be cuts in social security, pensioners wouldn't see their money, that sort of thing, which would be a political problem. But it also shows where the Fed's true priority is, is to pay off these investors. And they justify that somewhat by claiming the entire economy would collapse if they don't do it. But history shows that's not even true. So as I understand the bill that the House passed last night, it doesn't have a debt ceiling. It doesn't have a numerical limit. Even Mrs. Pelosi, presiding as Speaker of the House in her years, every time the debt ceiling was raised,

she insisted on a numerical limit. But Kevin McCarthy, the phony fiscal conservative, has signed off on, and the Republicans have followed him like lemmings, legislation that will let Joe Biden and Janet Yellen, as I understand it, Ryan, assuming the Senate goes along with this, borrow all the money they can get their hands on. Yeah, the debt limit is no longer an issue until 2025. Interesting that that just happens to coincide with the time Biden having his term over. Now, he could run again, I guess. But the point is, is that this entire administration for this term is now freed of the issue of having to even come back to the debt ceiling issue. So yeah, they could just borrow freely, then there's nothing in effect that limits nothing legally in effect that limits the amount of borrowing that they can do. Now, of course,

there's economic realities, the Fed would have to buy up boatloads more debt in order to keep interest rates from exploding. But in terms of legal limits, there's just nothing there now until 2025. So let's say that the federal government has bills of four and a half trillion because Congress has authorized the expenditure of that kind of money. Can they borrow five and.5 trillion just to have a trillion in the kitty for a rainy day? It looks like theoretically they could. Now, of course, the more they borrow, the more upward pressure that puts on interest rates, and they're afraid of pushing interest rates any higher. That's going to make banks go bankrupt even faster, and it would mean the Fed would have to purchase more and more government debt just to push those interest rates back down. So that's a limit in the sense of they're worried

about that. But sure, they could borrow endlessly so long as you have some mechanism where people are going to continue to buy up those treasuries that they put out there. Now, there may not be available buyers at anything under 6%, say, if you just keep just piling debt on top of debt. So we'll see just what happens here, how much bigger these debts can get, how much bigger the deficits each year. I guess no one in the Congress other than maybe the 40, 50 or 60 Republican so-called renegades is really worried about the long term is it not inconceivable with interest rates going up, with government borrowing going wild, in 10 or 15 years, we'll be spending, the federal government will be spending a trillion dollars a year in debt service and interest rates only without

reducing principal. Yeah, I think that's what's fooled so many people into thinking that just borrowing a trillion dollars has no real downside because it seemed like free money for a long time because we were looking at average interest rates on government debt at one, one and a half percent. It was just rock bottom, low sorts of stuff. So just imagine if you could just borrow money endlessly at 1%, right? Hey, why not just keep doing it. And if interest rates are never going to go up, you'll probably be fine. But the problem is, is now you just double that to 3% or 4%, which isn't even a high interest rate. Now suddenly you're doubling or increasing by 150% the amount that

you have to pay in debt service, just what you're paying in interest. And that was say 350 billion. Well, next thing you know, it's 700 billion and then 900 billion. And this is all just in the next five, six years. So then you're looking at a trillion dollars just to pay off your creditors. Well, where does that money come from? Well, you're going to have to take money from defense, from social security, from Medicare in order to pay those creditors. And that's going to be a real political problem for these people. But I guess we just have to be out of power by then. Ryan, does the government do the unthinkable? Well, the short answer to that is yes, but I got to finish the question. Does the government borrow money in order to pay interest on money it's already borrowed?

Well, they're essentially doing that now, right? Where it all just goes into one big pot, right? So the contrary to myth, right? It's not like your social security tax has to go to social security or something like that. It just goes into the pot and then it goes out the door to wherever it's deemed to be needed. So sure, any of that new debt, portions of it are being used to pay off the old debt. And so that's just the hamster wheel we're on. It's, well, take out new debt to pay off old debt and that's that's a that's the definition in some cases of a zombie company a zombie bank Correct, right you just take on new debt to pay off old it now that works so long as interest rates are going down as They have been for the last 30 years

Essentially, but once they start going back up then you start to get big problems as we're saying now. Here's an exhausted, necktie-loosened, hair-messed, confronting defeat, Chip Roy. Chip is the congressman from Texas who, cheering him on, led the renegade Republicans and may lead them again when they challenge Kevin McCarthy's speakership. Another issue for another time. But here he is at the tail end of a meeting of the House Rules Committee on which he sits when he knew that his efforts to stop this would be fruitless. This doesn't represent any material change in the direction of where this country is going in terms of spending. Massive increase of debt was sort of a blip on the radar. But even the Limit Safe Grow Act is just nibbling around the edges of what needs to be done.

I don't understand how my colleagues go to the steps of the Capitol and have all these groups from their middle school and elementary school and high school and talk to them about all the future of this country and where we're headed. When each and every one of them has a hundred thousand dollar debt payment attached to them each and every one of those kids has a one hundred thousand dollar debt attached to them that's a very powerful way of representing the futility of what the government is about to do. Yeah, keep in mind, this isn't like a home loan or something where you're paying off principal, and at some point it ends. This is not the trajectory the country's on. They're not like paying off something that's going to eventually go away. It's just a wheel that continues,

and they're just kicking the can down the road. And yeah, Roy is right. It doesn't change the material realities of spending at all. And keep in mind, we haven't, we're not going back to where we were before COVID when the federal budget was say, let's just say it was four and a half trillion about ish. And they had say 900 billion in deficit on top of that. Well, or a part of that was a deficit, but now we're at six and a half trillion. They suddenly ratcheted it up a couple trillion dollars and they've only slightly decreased it from that new peak. So we're a long way even from that trend that existed back in 2018. It's interesting. You point out something which you know, because we have worked together when I was at Mises. I have been arguing about, and I use the example of World War I, Woodrow Wilson borrowed $30 billion to fund World War I. Now the money's been rolled over,

but the $30 billion has not been reduced. And if you look at the total interest paid on that $30 billion, it's $15 billion. That's a 50% interest rate. Now, what entity on the planet could survive paying a 50% interest rate? Only the answer, only the federal government. That's right, because they always have access to more tax money. Do they ever reduce principal? Well, of course, in finance school, the favorite example are the consoles, the famous government debt that the British government issued to pay off the Napoleonic Wars. That stuff's still out there. That's still being traded. So here we are 200 years later so no this stuff it just gets recycled

and until that that state that government organization that just collapses and goes out of business like the soviet union that debt's always there and actually even the russian government took on a lot of that debt and only ended up paying it back sometime later so that debt never really quite goes away and people are only interested in retiring if the old regime completely collapses. So yeah, we're nowhere near resolving this issue. There's going to need to be a lot of pain before people either get sick of it and start talking about paying only part of it back or simply cutting enough federal spending that you can bring it all under control again. I mean, nobody's talking about any of that. Here's a boasting, gloating, arrogant

Kevin McCarthy after the vote saying he wanted to do this for history, etc., etc. I'll let you watch it In just a second One of his detractors We don't have the tape Congresswoman Nancy Mace of South Carolina Used the graphic And a little Indiscreet phrase Kevin McCarthy got taken to the cleaners

By an old man who can't even put his pants on Meaning Joe Biden Got to borrow all the money he wanted. And Kevin is still boasting. Here's Kevin arrogantly boasting. I've been thinking about this day before my vote for speaker, because I knew the debt ceiling was coming. I wanted to make history. I wanted to do something no other Congress has done.

That we would literally turn the ship. That for the first time in quite some time, we'd spend less than we spent the year before. Tonight, we all made history. Because this is the biggest cut and savings this Congress has ever voted for. And none of that can be true. Well, bragging that budget totals came down somewhat in 2024 is like bragging in 1947 that the federal budget was decreasing. I mean, of course it was decreasing after a period of completely insane runaway spending where all bets were off and there were no limits respected whatsoever,

because that's what happened during COVID. Let's just borrow an extra $2.2 trillion and just see what happens. So we should be talking about cutting trillions from the federal budget, and that would just be taking us back to 2019. But here's McCarthy bragging about cutting $40 billion. I mean, this is ridiculous chump change. And then by the time we're all done spending money on Ukraine and any other emergencies that happen to come up, I bet you it's going to be a higher number for the year anyway. How do they define mandatory spending versus discretionary spending, Ryan? Well, yeah, they like to slice and dice those numbers about, oh, well, we're actually cutting some discretionary spending.

But the bulk of spending is mandatory. It's Social Security. It's Medicare. It's Medicaid. It's some of these other relief programs where your interest on the debt, of course, is mandatory, where it's just baked into the legal reality. You would have to actually change statute in order to cut back some of that spending. They're talking about shaving a tiny bit off defense spending here, maybe a tiny bit off TANF, something like that. And so, yeah, we're talking about small, small numbers. And this is clearly a guy who spent a very long time in Washington to think that some amazing thing has occurred here. Let me tap into your knowledge of political history. Does anybody get thrown out of office for overspending?

I mean, find me right. Find me the congressman who was punished for signing off on increases in federal spending, because all he has to do is say, oh, community members, I brought you more Social Security spending. I brought you more Medicare. I spent more money on the military. So our local brave men and women are protected. And then everyone says, oh, great. That's good. That's what I was hoping things would be spent on. And then you just ignore the stuff that was being spent that shouldn't, that people don't like. That's the thing. People love more federal spending. They just don't want the spending on stuff they don't like, and they want more spending on the stuff they do like. And then both those sides use that knowledge to negotiate with each other, just spread the marmalade around, and everyone comes out fine and the voters never punish them. It's not about cuts. I'm thinking of the one thing that Jefferson and Hamilton,

who of course hated each other, agreed on. And that is when the public treasury becomes a public trough and the public recognizes that they will only send to Washington the people who promised to bring home the biggest piece of the pie, no matter where they get it from, even from the future. I just added that last line, no matter where they get it from, even from the future, because this is just a tax on the future. Right. I mean, deficit spending is not free money, even when it's at 1%, but now that it's at 3% or getting higher, according even to the federal government's own estimates, you're going to be paying a lot of money to pay off those old debts. You're still paying off old wars. You're paying off old medical spending.

And my children are even going to be doing that into the future unless something changes big time. Ryan McMakin, always a pleasure, my dear friend. Thank you so much for making time for us. We'll do it again soon. Thank you. Thank you. All the best. More as we get it. Scott Ritter, 1 o'clock Eastern tomorrow afternoon.

You'll be surprised as to where he's been in his month absence from our camera. Judge Napolitano for judging freedom.