2016 Presidential Candidates

The will be held on Tuesday, November 8th, 2016  ♦  2016 Presidential Candidates

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Economy 101: The American Economy In 30 Minutes

I. Of Cows and Chickens…

Let’s start with a farm, and you’re the owner, the de-facto government. Now let’s add a foreman, Tom, who is the citizen and labor market, and his lovely wife, Rita. Of course, we must have some cows for currency. Some chickens would be nice too, since you would need smaller denominations in your currency system.

In this scenario, your Gross Domestic Product is the sales generated from the total number of cows and chicken your farm trades each year. Tom and Rita’s health expenses are, obviously, your healthcare expenses. The deduction you make from Tom’s salary to pay for their monthly upkeep is the taxes. Your budget will be the forecast of next year’s income and expenditure of the farm as a whole.

However, the death of a pregnant cow last spring is severely taxing your ability to meet your current expenses. So, you offer your neighbor one of next summer’s calves in exchange for some grains to feed your cows now. That’s you issuing a government-backed Treasury Bond, for some immediate capital in exchange for your forecasted future production. It also, sadly, creates a Government Debt.

Tom and Rita meanwhile, were facing problems of their own. Your decision to reduce Tom’s salary and increase his monthly deductions for upkeep couldn’t have come at a worst time. Rita is pregnant, you see, and Tom must now source for external financing to pay for the hospital bills and the new room for the baby. So, he approached his best friend, Humphrey, from the farm next door for a loan. Tom promised Humphrey one of his chickens next year in return for some eggs now. That introduces Private Debt into the mix.

Now that Tom has his own supply of reasonably priced eggs to compete with those that you sell to him, you have no choice other than to reduce the prices of your eggs. That’s market forces and to a lesser extent, capitalism, at work. However, the presence of so many eggs in the community has reduced their value as a commodity, and instead of the normal average of 40 eggs per bushel of wheat, it has now gone up to 45 eggs. That’s inflation making its grand entrance.

The inflation of the wheat started a trickled down effect to other products in the community, including essential items such as livestock feed, iron farming tools and fashionable cowboy hats. It forces you to reevaluate your budget for the following year. Since you have to give one of your calves to your neighbor as your bond matures, you will not have enough money to pay for your expenses, and thus, turning your budget into a deficit budget, forcing you to plan for another Calf-Bond to be issued next summer to offset the projected income shortfall.

And there you have it folks. A basic economic model mimicking the fundamentals of a free market economy. Now that you have a clearer picture of the jargons used in the current national economic debate, let’s delve in a little deeper, shall we?

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II. American History E: A brief look at our economic evolution

Carl Menger, the neoclassical icon of the Austrian school of economics, defines an economy as the correlation between means and ends in a conscious attempt to improve our level of happiness, and “are subject to the law of cause and effect.”

These attempts that Menger spoke of, are dependent and shaped by the availability of natural resources, land and capital, and is influenced by the policies dictated by the ruling institution. In the case of the United States of America, the Founding Fathers, inspired by the proto-libertarian philosophy of John Locke, decided to abandon the mercantile system espoused by the British and their merchant princes in favor of a laissez-faire, isolationist model that sought to minimize the federal government’s direct involvement in the economy of the Thirteen Colonies. The reasoning behind this was simple: a centralized model would, over time, settle at the level of the weakest member of the confederation. Additionally, there is also the inherent risk that the interests of smaller members of the young nation would be swallowed by those of its larger ones.

The decision of Messrs. Washington, Jefferson, Adams and company proved to be a spectacularly correct one. Aided by the sheer, overflowing abundance of natural resources in the form of minerals, precious metals, farmlands and fisheries, among others; fueled by a steady stream of cheap labor, whose continued demands were met by a supportive and aggressive national immigration policy; and greatly powered by a bourgeoning class of young and intrepid entrepreneurs, the nation saw an unrivalled 150 year of economic prosperity, even in the face of the Civil War and seven other smaller international wars.

The American economy surpassed that of its former colonial master, Britain, for the first time in 1854, and 46 years later, it became the world’s largest economy, a position it has never relinquished since. But the extended honeymoon came to a crashing halt in 1929.

The heady days of the early twentieth century saw to the emergence of a new factor in the national economy: the economic warlords and market speculation. As the wealth of these warlords grew to unimaginable levels relative to everyday Americans, the attraction of ordinary enterprise-derived income suddenly became too trivial for these affluent personages. A new concept from the sophisticated and urbane financial centers of Europe made their way across the Atlantic – market speculation. Using vast sums of money, speculators learn that they could influence the stock, commodities and futures market through simple leveraging, aided by bank loans, to make huge overnight gains. The successes of these men invited other less wealthy, but equally ambitious men, to wade in and try their luck.

A slow, but increasingly evident distortion of the market and economy was taking place, and legislators realized that they needed a specialized body to deal with this seemingly obvious, but apparently legal, state of lawlessness. Furthermore, despite the manufacturing bonanza of World War I, the cyclic banking and financial market mini-meltdowns seems to occur with increasing frequency, with the most notable being the Panic of 1907 and the depression of 1920 ad 1927. It all points to deeper fundamental weaknesses in the self-regulated economy’s fiscal and monetary policies. The Federal Reserve was created on December 23rd, 1913, especially to oversee, manage, and where necessary, combat these types of economic malfeasance.

In October 1928, after extensive deliberations, the Federal Reserve decided to tackle the growing menace of market speculators head on by raising their discount rates to banking institutions. The prevailing sentiment then was this would choke the resources from speculators and return the market to more realistic levels with only minor collateral damage. In the nine-month period between October 1928 to July 1929, the Feds raised their nominal rates from 3.5 to 6%, (with actual realized rates between 5.6 to 9%). What happened next will remain a mystery for another 34 years, but it essentially precipitated the October 29 Black Tuesday - the most devastating stock market crash ever witnessed in the United States. Within two months, approximately $40 billion dollars were wiped off from the market, a figure equivalent to $5.6 trillion in 2011, relative to its share of our national GDP.

Note: The legendary economist, Milton Friedman, together with Anna Scwartz, wrote a definitive study of the Great Depression in 1963, A Monetary History of The United States (1857 – 1960). In the book, they explained how the decisions, and indecisions, of the Federal Reserve officials caused a monetary contraction in circulation, which sparked a series of domino-like effect on the economy. However, they also argued that the Federal Reserve was perhaps wrongly constrained in their decision making process by the false significance of maintaining the dollar to a fixed exchange rate against gold.

It effectively triggered the Great Depression, the single most destructive socioeconomic, political and cultural episode ever to occur in America. Between October 1929 to May 1933 (which is generally considered to be the nadir of the Great Depression), propelled by fear and a sense of hopelessness, the GNP shrunk by 49%, unemployment fell from 3 to 25% and deflation rose to double digit figures. The four years also saw massive retrenchments leading to hundreds of thousands of Americans losing their homes. Even the banking sector was pummeled, with saw the suspension of approximately 9,136 banks.

The Great Depression

Adding fuel to the fire, the drought affecting the Midwest in 1930 not only destroyed a significant amount of crop production that year, but years of neglect on the farmlands and the absence of sustainable farming techniques created, in the absence of moisture, dust storms that enveloped large tracts of the land, rendering it, already bereft of topsoil, unsuitable for any type of farming. It immediately destroyed the agrarian societies and the byproduct industries (logistics, processing, manufacturing, etc.) in the affected areas. As a result, not only did this create food shortages for the nation, it also left tens of thousands of citizens without a roof on their head, without any means of survival.

The Great Depression: Unemployment

The Republicans, a little unfairly, bore the brunt of the blame for the nation’s economic ruin, and the Democrats took full advantage of it. Franklin Delano Roosevelt trounced the incumbent, Herbert ‘The Worst is Over’ Hoover, in the 1932 presidential election and was inaugurated as president on March 4, 1933. With both the Senate and House of Representatives under Democratic control, Roosevelt’s slew of Keynesian-inspired New Deal economic measures were implemented without much resistance.

FDR: The New Deal

A full economic recovery was still a decade in coming (Gross National Product took another five years to return to its 1929 level), and unemployment rates only fell during the World War II (some cite the war conscription under the Selective Training and Service Act as the reason for the drop), but there was an evident surge in optimism among the people of the land.

42 separate mechanisms and legislations - fiscally, politically and socially - were enacted in Roosevelt’s first 100 days to prevent a recurrence of a similar catastrophe. Some of the most noteworthy ones were the:

    • Agricultural Adjustment Act of 1933 (farming subsidies)
    • Banking (Glass–Steagall) Act of 1933 (regulations for depository and investment banks)
    • Social Security Act of 1935
    • National Labor Relations Act of 1935 (prohibition against unfair labor practices)

These Acts signaled the entry of both the legislative and executive arms of the government into the uncharted waters of national economic management, and a step into Federalism. But the lingering fear of the Great Depression among the populace and some members of Congress heralded the arrival of the Employment Act of 1946.

The Act mandates the government, chiefly through the newly formed Council of Economic Advisors, a presidential level advisory board, to aim for full employment of the national labor force. The President is tasked with submitting an annual Economic Report to the Congress that details whether the objective has been achieved, and if not, the measures undertaken towards doing so.

Excerpt from the Act
The Congress hereby declares that it is the continuing policy and responsibility of the Federal Government to use all practicable means consistent with its needs and obligations and other essential considerations of national policy, with the assistance and cooperation of industry, agriculture, labor, and State and local governments, ... for the purpose of creating and maintaining, in a manner calculated to foster and promote free competitive enterprise and the general welfare, conditions under which there will be afforded useful employment opportunities, including self-employment, for those able, willing, and seeking to work, and to promote maximum employment, production, and purchasing power.

With the Democrats holding the presidency for 28 of the next 36 years (Roosevelt, Truman, Kennedy, Johnson), Roosevelt’s policy became the de facto economic blueprint for the country, seeping and firmly entrenching itself into the national economic construct. But Richard Nixon’s victory in the 1969 presidential election signaled a swing in fortunes for the Republicans as they went on to win seven out of the next eleven elections, and in the process, began to challenge the Keynesian tenets of the economy.

However, the expected fiscal and monetary ideological battle between the Democrats and Republicans has been regularly interrupted in the forty years since, with several global economic crises and intermittent wars. And all signs indicate that this presidential election, more than any other since 1932, will feature the most bruising battle of economic ideologies between the two dominant parties.

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III. Of the Economy and Financial Climates: The good, the bad and the something…

Now that we have familiarized ourselves with a basic chronological understanding of the nation’s economic progression since independence, perhaps it’s time we return to the present and wade through the unending stream of gloomy forecasts and woeful economic indicators we are being served with daily. It is no surprise that many Americans have been left silently wondering if things are as bad as they are made out to be.
We’ll delve into the matter in detail in the next two chapters. But first, let’s take a look at some numbers and try to slowly immerse yourselves into the complicated labyrinth that is known by some as the national economy. First off, let’s review several positive fundamentals of the American economy before we move on to the less than comforting subsequent segments.

The Good

• Gross Domestic Product (GDP)

For the 111th consecutive year (officially), the United States tops the worldwide GDP figures with 14.7 trillion dollars, a 2.8% growth from 2009.<

Source: World Bank

• Gross Domestic Product Per Capita (PPP)

The quickest way to ascertain the relative level of wealth of the population of any given country is through the average annual income of its citizens, or the GDP per capita. While the ranking is yet again dominated by wealthy, smaller nations, the United States once again came ahead of other major western economies, finishing seventh with $47,284.

Note: However, some argue that PPP figures do not reflect the income disparity between the top percentile and the low-income earners, especially in light of the low index score attained by the United States in the Gini coefficient (a statistical tool used to measure wealth distribution in an economy).

Source: International Monetary Fund

• International Reserve Currency

As countries around the world dusted themselves up and started to rebuild their battered economy following the devastation inflicted by World War II, the Bretton Woods Agreement was signed in July 1944 by 44 Allied nations. The agreement was aimed at facilitating cross border trade using a standard exchange mechanism. By virtue of being the biggest and most stable economy in the world, the US dollar was chosen as the international trading currency, with its exchange rate pegged at $35 per ounce of gold, and with that, the US dollar became the official trading and reserve currency of the world. Even after the dissolution of the agreement in 1973 following the free fall of the dollar, it continued to be the favored currency for trading. Today, despite the economic uncertainties facing the United States and the emergence of the Euro as an alternative reserve currency for central banks, the dollar continues to dominate.

Source: International Monetary Fund

• Gold Holdings

When all else fails, there’s always gold.
Despite the persistent rumors of the ‘unaccounted’ gold in Fort Knox, the Congressional investigative arm, the Government Accountability Office (formerly known as the General Accountability Office), has confirmed the presence of over 8,000 tonnes of gold (valued at almost $300 billion) in the vaults of the United States Bullion Depository (Fort Knox) and Federal Reserve Bank of New York, making United States the leading gold collector in the world.

Source: World Gold Council

• Foreign Direct Investments

One would assume that, in the face of the alleged, imminent collapse of the American economy, foreign investors would shy away from making any forms of investment here. However, the figures tell a different story, as over $2.5 trillion worth of foreign investments came in 2010.

Source: Central Intelligence Agency World Factbook

• External Investment

By the same reckoning, a distressed economy should see a contraction in overseas investments. But American corporations apparently did not get the note as they splurged a record breaking $3.5 trillion overseas last year.

Source: Central Intelligence Agency World Factbook

• Global Competitive Index

It is heartening to see, despite economic adversity, the United States still able to continue offering a competitive business environment, even if they slip to fourth, compared to second in the 2009 Index.

Source: World Economic Forum

Things do appear to be running rather smoothly, aren’t they? Even so, please refrain from popping the cork of the champagne bottle, as the story is about the get bleak. Very bleak.

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The Bad

So are things really as bad as they’re made out to be? Once again, let’s work our way through some numbers and see if they could shed further light on the matter.

• Unemployment
The rate of unemployment often accelerates in an inefficient economy pervaded by underlying structural weaknesses. It is surely one of the most demonstrative statistical indicators available for the general health of an economy. A quick look at the nation’s unemployment figures reveals a decidedly alarming four-year trend that appears to be rising exponentially.

• Supplemental Nutrition Assistance Program

More commonly known as the Food Stamp Program, past participants of the initiative used to be concerned with the associated social stigma. However, with one in eight Americans being part of it, totaling in excess of 44 million people, the apprehension is now long gone. But considering that the program’s benefits are only extended to citizens classified as either in or near poverty, the rising expenditure is cause for great concern.

• Federal Budget Deficit
For the ordinary man on the street, spending more than one earns points to a fundamental character flaw. It also demonstrates a distinct lack of discipline and foresight. However, for a country to fall into a similar trap, it unfortunately portends to the apathy and injudicious motivations of the elected officials tasked with managing our national budget; the same ones who have decided to dump the cumulative past, present and future debts into the laps of our unborn, and yet to be named, descendants.

For the past 43 years, we have had only THREE surplus budgets (1999-2001, arguably and probably attributable to former President Clinton and his band of merry economists, alongside the influx of pre-Dot-Com bubble burst cash and the end of the Cold War). That’s a batting average of .930 for the folks in Washington, no mean feat by any stretch. It is an achievement that will probably be looked upon with incredulity, bewilderment and anger by our unnamed future children.

• Federal Debt

The government borrows money to bankroll budget deficits, and in the process, creates the federal debt. The snowball effect of our recurrent annual budget deficit has reached gargantuan proportions, of the likes never seen before in the world or on Saturday Night Live. So much so, that every citizen now owes close to $47,000 dollars each to some faceless lenders. Babies born in the country are not only rewarded with citizenship, they also have the honor of having a share in the national debt basket.

• Private Debt
Let he who is without debt cast the first stone – a sentence that every legislator in Washington, bearded or otherwise, is just itching to throw back to us. Probably. After all, as bad as the federal debt is, it simply pales in comparison to the debts held by the private sector. Our mortgages, credit cards, debts of local municipalities and state authorities have created a many-headed hydra of a debt that is three times the size of the Federal one.

So what does all these numbers, charts, graphs and pictures tell us? Nothing we didn’t already know. Nevertheless, it did very clearly illustrate our Achilles Heel, which is also the most critical aspect of our economy, the deficits and debts; subjects which we will discuss in detail in the last two chapters.

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The Something

Don McLean: American Pie

A long, long time ago, I can still remember
When Phil Gramm sponsored the Commodity Futures Modernization Act of 2000…
And no one knew what would come next
As ‘sophisticated parties’ no longer fall under
The Commodity Exchange Act of 1936
Or the SEC and the Commodities Futures Trading Commission
Leaving the emerging derivatives industry functionally self-regulated…
It continued even after the Enron’s energy derivatives speculation fiasco
And culminated with the 2008 sub-prime mortgage crisis

I can’t remembered if I cried
When I read about the size of the
OTC credit swap derivatives market
The day when I heard 601 trillion for the first time…

The end.

Ps: We would love to elaborate more on the subject. Unfortunately, since the industry is essentially self-regulated, very few substantive independent data is available for this major component of the so-called shadow banking system of Wall Street. Besides reports from the market players themselves, there’s really naught else to speak of.

We can only bite our nails waiting for the inevitable sneeze from the six hundred trillion-dollar behemoth (ten times the size of the ‘real’ global economy) that would once again shake the very core of the whole fiscal and monetary system of the United States of America. In the meantime, why don’t we all resume with our huffing and puffing about the $1.5 trillion budget deficit, and just pretend that's not a lion curled up on the couch in our living room?

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IV. Of Budgets, Deficits and Debts

We’re going to let you in on a little secret. But first, pull up a chair and get yourselves seated. This is going to hit you hard.

You see, based on historical, ideological, cultural, national and behavioral precedents, our colossal federal debt will NEVER be paid off. There are just too many conflicting agendas and motives at play here to prevent it from becoming a realistic possibility. Even if we somehow manage to miraculously elect 537 clones of George Washington to Congress and the White House, all independents at that, the depth of sacrifice and belt tightening required from us, the citizens, will be overly excessive to stomach. The wholesale pork-barrel cuts, the hefty tax hikes, the across the board termination of approximately 245 state and federal subsidy programs – all this will significantly alter the lives of a significant number of ordinary Americans.

.However, you wonder, what if the citizenry suddenly and inexplicably grew a collective conscience and transformed into a selfless and altruistic society; would it be possible then? Still no, unfortunately. For in such an instance, the demand for the long-neglected reinvestment of our archaic and decaying national infrastructure will undoubtedly take precedence.

Plus, there is also the matter of the global economy to reflect upon. A dramatic shift in our fiscal and monetary policy will cause an endemic worldwide economic crash that will inevitably produce a backlash to our very own shores as well. Despite the flaws of our economy, it is still the biggest in the known universe and Americans remains the largest and most prolific buyers of international goods and services. Without America propping the world’s manufacturing sector and its byproduct industries, a series of domino like economic collapse will take place the world over, beginning from the industrial hotspots of Guangdong and Selangor, to bustling Pune and Cairo, followed by beautiful Barcelona and Randstad, before crossing the Atlantic to Sao Paulo and Cordoba in South America.

We are of course working on the premise of the nation not getting dragged into yet another armed conflict.

However, we’re getting ahead of ourselves. Let’s take a step back and return to our budgets, deficits and debts. We have compiled below a 41-year table illustrating some major economic statistics for you fine folks to stare and gape at, before fainting.

The Table of Irresponsible Governance (1970-2010)

A deficit budget is not necessarily a bad thing. At times, it is a powerful and essential economic tool. For instance, the Keynesian school of thought believes that a suitably deployed deficit budget will spur demand in a weak economy, automatically increasing production and maintaining employment levels.

However, 38 budget deficits in 41 years clearly demonstrated a careless and unsustainable approach towards the national economy. If such an approach were practiced in the private sector, not only will the management of the firm be fired, the board members would face serious risks of criminal charges being filed against them.

So you think we’re being too hard on our legislators? Take another look at the table and consider this.

In 41 years, our debt has risen to almost the same as our total national economic output, and based on projections, the debt will surpass our GDP either this year or the next. Still feeling a little sympathetic? We’ll give it another shot.

In the same 41 year period, our debts, through chronic budget deficits, increased from $381 billion in 1970 to $13,787 billion in 2010 - a $13.4 trillion increase. And here’s the kicker; we paid $5,730 billion in interest during the period.

$5.73 trillion in interest alone.

In case anyone has trouble visualizing the sheer magnitude of that number, please allow us to illustrate. With $5.73 trillion, you can buy a $23,453 Ford F-150 everyday for the next 668, 931 years.

With $5.73 trillion, you can buy a $499 iPad 2 for every single American for 37 consecutive years.

With $5.73 trillion, you can end world hunger. You can immunize, educate and provide shelter for every single one of the estimated 1.35 billion to 1.7 billion people living in absolute poverty worldwide. You will be able to end generational poverty, with enough left over to initiate a major redevelopment initiative involving the supply of clean water, electricity, farming, small-scale manufacturing and wipe off the debts of countries (some countries use the equivalent of half their GDP to pay for loans to ‘donor’ countries and the IMF).

Wait a minute, you suddenly wonder. To whom are we paying these interests to? Who is lending us these obscene amount of money? We’re glad you wondered.

The Bureau of the Public Debt (BPD) of the Treasury Department is the primary government unit in the country’s borrowing mechanisms. Financing requirements are sent to the BPD, who will then issue one of the following Treasury instruments:

  • Marketable Securities (tradable in the open market; including the private sector and individuals)

    • Treasury Bonds

    • Treasury Notes

    • Treasury Bills

    • Treasury Inflation Protected Securities (TIPS)

  • Intragovernmental Holdings/ Non Marketable (non-tradable; restricted to Federal and State bodies, including the Social Security Trust Fund and Medicare Trust Fund)

    • Government Account Series (GAS)

    • State and Local Government Series (SLGS)

The BPD manages the sales process (through primary government securities dealers), reporting, interest payment and redemption of the borrowing instruments at their respective maturity dates. As at June 30, 2011, America’s debt figures stand officially at $14.343 trillion, consisting of $ 9.74 trillion marketable Treasury instruments and $ 4.6 trillion intragovernmental holdings. So how do the numbers stack up? Let’s have a look.

As you may have noticed, intragovernmental holdings constitutes almost a third of the federal debt. Institutional and private investors (local) meanwhile, are second and sixth, with the Federal Reserve, the People’s Bank of China (which incidentally is the biggest ever bank in the history of human civilization, based on assets) and the Bank of Japan coming in third, fourth and fifth respectively.

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V. Of Debts and Ceilings

In a letter to the Senate Majority Leader, Senator Harry Reid of Nevada on January 6, 2011, Treasury Secretary Tim Geithner stated,

“…the Treasury Department now estimates that the debt limit will be reached as early as March 31, 2011, and most likely sometime between that date and May 16, 2011. This estimate is subject to change...”

In a follow-up letter to Senator Reid on April 4, 2011, Secretary Geithner wrote,

“The Treasury Department now projects that the debt limit will be reached no later than May 16, 2011… If the debt limit is not increased by May 16, the Treasury Department has authority to take certain extraordinary measures...would be exhausted after approximately eight weeks, meaning no headroom to borrow within the limit would be available after about July 8, 2011”

On May 2, 2011, Geithner sent his third and final letter to John Boehner, Speaker of The House of Representatives, stating that,

“Therefore on May 16, I will declare a “debt issuance suspension period” … we now estimate that these extraordinary measures would allow the Treasury Secretary to extend borrowing authority until about August 2, 2011 … I want to emphasize that, contrary to common misconception, the debt limit has never served as a constraint on future spending, nor would refusing to increase the debt limit reduce the obligations the country has already incurred. Increasing the debt merely permits payment of obligations Congress has already approved…”

The crux of the 2011 debt ceiling crisis revolved around the administration’s attempt to amend the statutory debt limit written in the Pay-As-You-Go Act of 2010 (P.L. 111-139). The legislation limited federal borrowings to $14,294,000,000,000, and the Obama administration were aiming for a minimal upwards revision of $738 billion, which corresponds with the projected government outlay for the remainder of Financial Year 2011.

The debt limit was already surpassed on May 16, 2011, and the country was left effectively penniless. Treasury Secretary, Tim Geithner, declared that all stalling tactics have been exhausted and the United States of America will, for the first time in its history, default on their financial obligations after August 2, 2011, if Congress fails to pass the debt ceiling amendment.

Geithner had repeatedly stated over the past several months that the debt ceiling had no relevance to ongoing policy discussions, as the money will be channeled for expenditures already approved by Congress and charged to the Treasury. The Republican leadership however, led by House Speaker John Boehner and House Majority Leader Eric Cantor, contends that the debt ceiling is the leverage they need to bring the wasteful Obama administration back into the negotiating table for discussions on future fiscal and monetary policies, specifically on future spending cuts. While this is not the first-time debt-ceiling skirmishes has occurred, this was by far the most public and hostile one yet.

A deal was eventually struck between the Democratic and Republican legislators one day before the Geithner deadline, and in the process, pulled the American economy back from the brink of disaster. The new deal will see an immediate $400 billion increase in the debt ceiling, with another $500 billion coming in by the fourth quarter of 2011. The ceiling will be raised a further $1.5 trillion in the next financial year, ensuring a similar battle will not recur on an election year. However, as part of the deal, the Republicans demanded that all the increase must be matched by spending cuts, which will be determined by a bipartisan congressional committee.

While we savor the conclusion of this most unappealing of legislative dramedies, why don’t we take a stroll down memory lane and learn a little bit more about the debt ceiling and how it came into being?

There was a time when America was a nation of great fiscal discipline, and the government’s spending is dependent solely on the revenue it generates. Alas, the arrival of the 20th century saw an increase in infrastructural demands, prompting the Congress to authorize the issuance of one-off government bonds. However, the experienced of World War I forced a rethink of the situation.

Owing to the highly fluid nature of capital requirements, and the need to preserve the secrecy of the Treasury funding level, the Congress passed the Second Liberty Bond Act of 1917. The Act provided the federal government with the ability for long-term fiscal planning, and in the process, reduces the rate of short-term interests and overall cost of government securities.

However, Congress was cognizant of the threat of a runaway government spending and placed a debt limit mechanism into the Act that creates a statutory limit, or debt ceiling, to keep the government in check. It also compels the government to provide a retroactive report on any subsequent debt ceiling increase request. The initial ceiling set by the Congress was $11.5 billion. The Second Liberty Act has since then been incorporated into the Constitution (31 USC 3101 - Sec. 3101, public debt limit).

The debt ceiling has been amended regularly ever since, and based on the data from the Office of Management and Budget, there have been 102 separate amendments since 1940, as illustrated in the table below.

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2012 Republican Presidential Nominee
Former Governor of Massachusetts

Mitt Romney

Presidential Candidate Mitt Romney

Romney Position on the Economy

Update: Romney became the second Republican presidential candidate, after Jon Huntsman, to offer a full-fledged detailed economic plan when he announced a 59-point job and economic proposal during a speech at the McCandless International Trucks dealership in Nevada, Las Vegas on September 6, 2011. Called 'Day One, Job One', the plan's main objective would be to "restore America to the path of robust economic growth necessary to create jobs.".

If elected, Romney pledged to initiate 10 major actions on the first day of his presidency, consisting of five Bills and 5 Executive Orders, which are

5 Bills For Day One
The American Competitiveness Act
Reduces the corporate income tax rate to 25%
The Open Markets Act
Implements Free Trade Agreements with Colombia, Panama, and South Korea
The Domestic Energy Act
Directs the Department of the Interior to undertake a comprehensive energy review
The Retraining Reform Act
Consolidates federal retraining programs and return these programs to the states
The Down Payment on Fiscal Sanity Act
Immediately cuts non-security discretionary spending by 5 percent ($20 billion)

5 Executive Orders For Day One
An Order to Pave the Way to End Obamacare
• Secretary of Health and Human Services to return the maximum possible authority to the states
An Order to Cut Red Tape
• All agencies to initiate the elimination of Obama-era regulations that burden the economy or job creation
An Order to Boost Domestic Energy Production
• Department of the Interior to implement a process for rapid issuance of drilling permits to
An Order to Sanction China for Unfair Trade Practices
• Department of the Treasury to list China as a currency manipulator and the Department of Commerce to assess countervailing duties on Chinese imports
An Order to Empower American Businesses and Workers
• Reverses the executive orders issued by President Obama that tilt the playing field in favor of organized labor

“Today, I’m introducing a plan consisting of 59 specific proposals — including 10 concrete actions I will take on my first day in office — to turn around America’s economy. Each proposal is rooted in the conservative premise that government itself cannot create jobs.”


“And change is going to have to begin with us, in our party. We're the party of change. We are the party of fiscal responsibility, and when Republicans act like Democrats, America loses. And you've seen that over the last several years.

We're going to have to make sure that we rein in spending. It's not just the -- we -- we all agree on the -- the earmarks and the pork barrel spending and the "Bridge to Nowhere." That's -- that's an easy one to take a shot at. But the big one is entitlements and reining in entitlement costs, and that's -- that's where the big dollars are.

And then you go on to say how are we going to bring down taxation, because we have the highest tax rate, next to Japan, in the world. That's -- that hurts our economy.

What you're seeing in a weakening dollar, in a declining stock market, in -- in foreign countries coming here to -- to buy into our banks, you're seeing an underground -- the foundation of our economy being shaken by the fact that we haven't been doing the job that needs to be done in Washington. And I'm going to Washington to change Washington.”

January 24, 2008, Republican Presidential Debate, Boca Raton Florida

"It is instead however an objective for us to balance our budget and to take in as much money as we spent. How do you do that? Well you have to cut back on spending and I propose, I don't know if the other candidates are willing to sign for the same pledge, and that is, I'm going to take non-military discretionary spending and I'm gonna say I'm gonna cap that at inflation less one percent. So, one percent lower than inflation and that saves us 300 billion dollars over the next ten years. And that’s one commitment that I made, that’s what I’m gonna do. (If) Congress sends me appropriations bill which exceeds that amount, I will veto them. I like vetoing.

But I am a fiscal conservative. I believe in cutting spending and cutting taxes."

April 03, 2007, New Hampshire Federation of Republican Women's Lilac Dinner

"I'd like to start by balancing our budget and get it to a point where we stop spending more than we take in our national debt you know is huge in its total scale and actually eliminating of the national debt is not something I would put down as an objective in the first four years that’s for sure."

April 03, 2007, New Hampshire Federation of Republican Women's Lilac Dinner

Romney, who prides himself on being a pragmatic and successful businessman, is a proponent of Reaganomics.

"The last time we had a recession, in the Bush years, President Bush recognized the best thing you can do is lower taxes and put forward a tax bill. And John McCain was one of only two Republicans to vote against it, and said he'd go back and vote against it again if he could.

He does not understand the first lesson of Reaganomics, which is, you cut taxes to grow the economy.”

January 27, 2008, CNN Late Edition With Wolf Blitzer

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Declared 2012 Republican Presidential Candidate
U.S. Representative from the State of Texas

Ron Paul

Presidential Candidate Ron Paul

Paul Position on the Economy


“We have to stop the spending. We have to bring our budget under control. We can't raise taxes to cut the deficit. We have to cut spending. Of course, where I want to cut spending might not be where you would like to cut spending. But I want to cut spending overseas. I don’t think we can maintain our empire. And we can get control of our budget mainly for political reason as much as anything else because you can't go after healthcare here in this country and say you're gonna balance the budget.

But we have to take the pressure of the fed to create money. You know, we spend, and then we tax, and we borrow and we still don’t have enough money. So we have this ridiculous monetary system where we go to the Federal Reserve and say buy this treasury bills, and they buy the treasury bills with money out of the clear blue, out of the thin air, and this is causing the inflation. The cost of living for our retired people now is probably going up 10% a year, and they're getting cost of living increases at 2%.

This is why so many people are unhappy. We have to deal with the budget. To me, this is the most critical thing, and if we don't, we're gonna have a financial crisis, and a dollar collapse. It's gonna be a lot worse than it was in 1979, 1980, when we save the dollar with interest rates at 21%”

December 18, 2009, CNN


“We are an immoral nation, but the immorality is through our government. Bastiat (French economist Frederic Bastiat, 1801-1850) when he wrote the law, he made this very clearly, the point, he says if you and I can’t steal from our neighbors, we don’t have the moral right to ask our government to do the same thing. So it is the moral aspect of the law, and we have become an immoral nation because because we think that if you transfer wealth through the government force, that its legitimate, and it’s an entitlement, and they have a right to it.

As long as we have that, then no, there's no way you and I can agree with that, there's no way we can solve our problem. But if you feed the system and allow people to get this benefits, it perpetuate the welfare state. It never will reverse. So I say, let’s start reversing it and start cutting the spending”

December 18, 2009, CNN


“When a country, and an individual, is broke, they're supposed to quit spending money and they're supposed to pay off their bills. But the only thing we've done here in Washington, is the admission that there's a crisis going on. We've accelerated everything. We've expanded government, expanded spending, expanded borrowing, and expanded the function of the Federal Reserve, that is to create more money and credit to try and bail out the problems they created. Oh yes, we're in for a lot of trouble.

… The country is technically bankrupt and if you and I were in business, I guess we would have to declare bankruptcy. Government print money so they can get away with it. But we are insolvent, the debt will never be paid for. That's a hard thing to accept, but you can’t pay for this debt. But the debt will be liquidated, the market always liquidate debt, governments always liquidate debt by destroying the currency. They pay off their debt with bad money and that's what we're in the process of doing. We took the bad debts of the bank and we dumped it on the American taxpayers deliberately, so it’s a transfer of wealth right now.”

February 26, 2010, CNN

Paul also offered an unorthodox, yet brilliant solution to wipe of 11% of the current federal debt. He proposed that we write-off the $1.6 trillion government bonds that the Federal Reserve currently holds, instead of servicing its interest and ultimately redeeming it. Being an arm of the federal government, it would simply mean the cancelling an internal IOU – with no significant effect to the market. This would instantly give the national economy some breathing space and cancel all debt ceiling discussions for the next couple of years.

"We owe, like, $1.6 trillion because the Federal Reserve bought that debt, so we have to work hard to pay the interest to the Federal Reserve. We don't, I mean, they're nobody; why do we have to pay them off?”

June 28, 2011, CNN

Paul’s economic philosophy is shaped primarily by one of the most important figures in the Austrian school of economics, Ludwig von Mises. Paul explains,

“My introduction to Austrian economics came when I was studying medicine at Duke University and came across a copy of Hayek’s The Road to Serfdom.2 After devouring this, I was determined to read whatever I could find on what I thought was this new school of economic thought—especially the work of Mises. Although the works were magnificent, and clarified many issues for me, it was more of a revelation
to find intellectuals who could confirm what I “already knew”—that the free market is superior to a centrally planned economy. I did not know how a free market accomplished its work, and so the study of economics showed me this, and how to build a case for it. But, like many people, I did not need to be convinced of the merits of individual freedom—for me that came naturally.”

1982, Mises and Austrian Economics: A Personal View by Ron Paul

In his 2008 presidential campaign, Paul even roped in Peter Schiff, one of the country’s foremost proponent of the Austrian school of economics, to be his economic consultant.

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Declared 2012 Republican Presidential Candidate

Matt Snyder

Presidential Candidate Matt Snyder

Snyder Position on the Economy

"Most of our current issues contribute to our economic situation in one way or another. Fixing ALL contributing factors fixes the economy. High taxes, illegal immigration, welfare, gov’t waste, education, war, and other issues contribute. All of these must be addressed."

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