Last week the Wall Street Journal published an opinion piece by David Malpass, former deputy assistant Treasury secretary during the Reagan administration.  He gives great insight to the financial, business and political angles of the federal government shutdown and the looming debt ceiling deadline that is fast approaching.  You can read his entire opinion piece here, but below I will share with you some of what I believe to be the highlights of the piece.

How much does the federal government spend?

It {federal government} is spending $3.6 trillion per year without a budget, and its expenditures are expected to increase rapidly in the years ahead.  Meanwhile, the government has piled up $17 trillion in debt and $60 trillion more in unfunded spending promises. The Federal Reserve will borrow $1.1 trillion in 2013 alone to buy bonds—and it reserves the right to borrow unlimited amounts for future bond purchases without congressional or presidential permission.

Is all of the spending by the federal government justified?

Washington’s panic prior to the budget sequester that took effect earlier this year gave a glimpse of the truth: Much federal spending can’t be justified. The government shutdown is giving more insight into the problem—a staggering $250 billion per month, 80% of spending, runs on autopilot without any congressional involvement or control. So much for the Constitution’s bedrock principle that “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.”

Legislative changes are imminent

Mr. Obama has made clear that he will not change ObamaCare, but given the challenges the country faces, a blanket insistence on keeping the whole government unchanged isn’t defensible.  One good starting point for presidential leadership is the fraud-plagued federal disability programs that cost taxpayers $200 billion annually. There are innumerable other such programs, as well as roughly 200 independent federal agencies, many with little purpose and certainly not enough purpose to justify more debt.  To avoid future stalemates like the current one, making a legislative change is clearly imperative: The current debt-limit law, despite its name, operates to make the debt larger, not smaller. The law should be rewritten to mandate continuous spending restraint when debt exceeds the ceiling.

Are we going to repeat what happened in Europe last year across the pond?

The Fed is choosing to buy long-term bonds with short-term debt. The result is a rapid shortening in the effective maturity of the national debt that benefits current politicians but puts taxpayers at risk. Like an adjustable-rate mortgage, the borrower, in this case the government, gets a lower interest rate now but will have to refinance at higher rates later.  Compounding the taxpayer risk, Treasury has scheduled a November launch of a new class of floating-rate debt that will compete with the Fed’s debt when interest rates begin to normalize. This leaves a huge portion of the national debt exposed to higher interest rates. And as Europe’s weak southern flank demonstrated in their 2010-12 crisis, financial markets treat floating-rate and short-term debt like blood in the water.