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So How Exactly Does More Borrowing Improve Credit Worthiness?

Upside down economics from Geithner and Obama...

MORE FUN and games in Washington, notes Eric Fry at the Daily Reckoning.

Over the weekend, US Treasury Secretary, Tim Geithner, warned, "A default [by the US government] would inflict catastrophic, far-reaching damage on our nation's economy, significantly reducing growth and increasing unemployment."

Geithner's solution: Borrow more money.

President Obama engaged in similar fear-mongering on CBS's Face the Nation. Said the President: "[If investors] around the world thought the full faith and credit of the US was not being backed up, if they thought we might renege on our IOUs, it could unravel the entire financial system. We could have a worse recession than we've already had."

Obama's solution: Borrow more money.

Both Geithner and Obama are urging Congress to raise the nation's $14.29 trillion debt ceiling. Neither Geithner nor Obama is addressing the dubious logic of borrowing money to bolster credit-worthiness.

The US was due to reach its debt limit on Monday. But Geithner says he can juggle some things around at the Treasury to keep the cash flowing until early August. The government can continue borrowing until mid-summer, Bloomberg News explains, "by taking steps that include declaring a 'debt-issuance suspension period' under the statute governing the Civil Service Retirement and Disability Fund."

To be sure, desperate times call for desperate measures. But we are not certain that desperate insolvency calls for desperate borrowing…and half-hearted attempts at fiscal restraint.

Geithner and Obama may have their macroeconomic snow globes turned upside down. Christmas trees don't hang from the sky, scattering snowflakes across the clouds below. And neither do trillion-Dollar deficits buttress the "full faith and credit of the United States."

"Even a short-term default could cause irrevocable damage to the American economy," Geithner warns. Maybe so, but long-term fiscal recklessness is the blight that is already causing irrevocable damage to the US economy…and the US Dollar. Default is merely an effect, not a cause.

"To raise the debt ceiling without dealing with the underlying problem is totally irresponsible," scoffs House Speaker, John Boehner.

Senate Minority Leader, Mitch McConnell, concurs: "We need to do something significant. We need to impress the markets, impress foreign countries that we're going to get our act together, and astonish the American people that the adults are in charge in Washington and are actually going to deal with this issue."

I have no particular grudge against Obama and Geithner, nor any particular affinity for Boehner and McConnell. (Neither the Democrats nor the Republicans hold a monopoly on bad ideas).

But I do have a certain contempt for idiotic notions that purport to work, simply because they have not yet failed. And I also have a certain fondness for discarding idiotic notions before they cause irrevocable harm.

One of the foremost idiotic notions of the moment is called quantitative easing (QE). That's the process by which the Federal Reserve prints Dollars to buy bonds from the federal government. Ben Bernanke, the architect and leading advocate of QE, says printing Dollars will stimulate economic growth. A companion idiotic notion is that the government can stimulate economic growth by spending money it does not have.

Operating in concert, these idiotic notions simultaneously debase the Dollar and increase national indebtedness. Which brings us to the leading idiotic misconception of the moment – that "spending cuts" are synonymous with "debt reduction."

President Obama says he wants to "trim" $4 trillion from the federal budget over the next 12 years. To most Americans, that sounds like debt reduction. But it's not. It is only a cut in planned spending, the effect of which would make the planned budget deficits slightly less obscene.

In other words, Obama's "money-saving" budget proposals would cost America trillions of Dollars – trillions that the government does not possess, that taxation alone could not raise and that foreign creditors would be increasingly unlikely to provide.

According to analysis by the Congressional Budget Office (CBO), the president's budget would produce average annual deficits of nearly $1 trillion over the next 10 years. Total indebtedness would soar by a massive $10 trillion over that timeframe, as total annual spending would surge 57 percent – from $3.7 trillion this year to $5.8 trillion in 2021. In reality, these deficit numbers would probably be much higher still.

The CBO's terrifying projections include an array of hopeful assumptions, the most significant of which are that interest rates remain near generational lows and that tax revenues climb at a robust pace. The president is counting on tax revenues to double over the next ten years.

For as long as the leaders of this nation portray "money they don't borrow" as "money saved," the Dollar will remain a long-term "sell," while gold and silver will remain long-term "buys."

Buying Gold today?...

Eric J.Fry has been a specialist in international equities since the early 1980s. A professional portfolio manager for more than 10 years, he wrote the first comprehensive guide to American Depositary Receipts, International Investing with ADRs. Today he reports on Wall Street from California for the renowned Daily Reckoning email service.

See full archive of Eric Fry articles

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