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Reality Trumps Antics

12:00 AM, Apr 30, 2011 • By IRWIN M. STELZER
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Whether the Fed’s decision to end its bond buying program will bring the current modest recovery to a halt, or its decision to keep interest rates down for the foreseeable future will more than offset the decision to stop the presses, is difficult to tell. One thing is certain: the center of gravity in political debate here in Washington has shifted. It is difficult to find anyone besides a few members of the hard-left of the Democratic Party, and some academics, who believe that the job of deficit cutting can long be postponed.

Meanwhile, when Congress returns, the debate over raising the debt ceiling will resume. The president, who voted against such an increase during his short stay in the Senate, wants it raised lest the credit of the U.S. be ruined by a default. The Republicans, who voted to raise it when George W. Bush was in the White House, want some sort of constraint on spending included in any decision to raise the ceiling, or else they will refuse to go along with an increase.

Both sides are predicting disaster if the ceiling is not raised. Which former George W. Bush treasury official Emil Henry Jr. points out is nonsense. “Since 1962,” he writes in theWall Street Journal, “the US has reached its debt ceiling 74 times, about once every eight months. Every time, the ceiling has been raised with little notice outside of Washington.” The government has frequently functioned after the ceiling has been reached—treasury officials are no less adept than those at major banks in finding spending that isn’t really spending for accounting purposes, or pockets of funds that can temporarily be tapped until the politicians work things out.

But the tactics that worked in the past might not work now. The day is long gone when no rating agency in its right mind would challenge the credit-worthiness of U.S. securities, when the bond vigilantes rode the pampas of Argentina and the steppes of Russia, but not the home of the world’s reserve currency.  

Better to escape these realities by watching Donald Trump do his comedy routine, examining the president’s birth certificate to determine its authenticity, than to worry about arcane debt-to-GDP ratios. For a few days at least. On Monday Congress returns, and reality bites. 

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