President Obama has warned that if the debt-ceiling crisis isn’t resolved this month, he can’t guarantee payments to Social Security, Medicare, Medicaid, unemployment and veterans pay on August 3rd. The President planned big 50th birthday bashes for himself beginning on the 3rd, so, that caused me to suspect things weren’t as bad as portrayed. But what is the truth and have we ever been in this situation before?
From the Ludwig Von Mises Institute, a short history of U.S. credit defaults: The U.S. has had five defaults in its history and I have linked to the brief account on the site, but the summation follows…Many people are wondering about the possibility of a default by the Treasury on August 3, 2011, when, according to the Treasury’s projections, it will no longer be able to meet all expenses without additional borrowing.
In this event, it is unlikely a default will occur. Historically, governments prioritize debt service above all other expenses. If the expansion of funds via debt becomes impossible, the Treasury will cease paying other expenses first, starting with “nonessential” discretionary expenditures, and then move on to mandatory expenditures and entitlements as a last resort.
In extremis, what will happen is that all the losses will be foisted onto the Federal Reserve. The Fed holds something on the order of $1.6 trillion in debt issued by the Treasury of the United States. By having the Federal Reserve purchase blocks of Treasury debt and defaulting on these non-investor-held securities, the United States can postpone a default against real investors essentially forever…Read here: A short history of U.S. credit defaults
Fox published an article about seven myths surrounding the impending debt-ceiling disaster:
1) Not increasing the debt ceiling means the U.S. government will default on its debt: – not true because by not raising the debt-ceiling the government can no longer borrow and will have to limit spending to revenue that is coming in. That’s not a disaster.
2) Until the debt ceiling is raised, uncertainty over the payment of U.S. debts will create chaos in financial markets: – no, the Constitution demands that U.S. debt be paid first before all else. Failure to increase the debt ceiling does not mean default.
3) Obama doesn’t know if there is money to send off Social Security checks on August 3: – no again, there will be enough money to pay interest on the debt and cover Social Security, Medicare, Medicaid, children’s health insurance, defense, federal law enforcement, immigration, veterans benefits and respond to natural disasters. The President knows this.
4) Mortgage interest rates will rise dramatically if the debt ceiling isn’t increased: – not likely, it might actually lower interest rates because the government won’t be able to borrow.
5) Time is Running Out on Debt Deal, and it must be done immediately: – oh, please, we’ve been here before without calamitous results, the President has not explained why this time is different.
6) If government spending is cut, there will be a depression: – oh right, President Obama’s Keynesian approach with a 28% increase in government spending, a Stimulus and $4t in deficit spending has done the opposite so why would not spending cause what spending has already caused?
7) The value of the dollar will plummet: – why would that happen? There is no reason to believe this. There will be no default unless the President violates the Constitution. In addition, reduced government borrowing means lower taxes and it will attract investors. Read here: Mythical debt-ceiling collapse
From the opposite viewpoint, the NY Times opinion page talks about it as an impending disaster: On May 16, the United States hit its legal debt limit of $14.3 trillion. Unless that limit is raised, the Treasury will, on Aug. 2, be unable to pay its bills. It will then have to either stop spending money on government programs, or default on paying the nation’s creditors.
The White House and Congressional Republicans agree in principle that the debt ceiling needs to be raised, but they are at an impasse on how to constrain the deficit’s rapid growth. Meanwhile, some people have theorized that there’s a way to get around the debt limit…Read here: NY Times
The problem with the Times opinion piece is the writer ignores the fact that the government will receive $200 billion in revenue each month and can choose to pay essential services and the interest on the debt. If they do not, it is their choice, a choice which would be political. In the end, the markets will react very badly to doing nothing and a deal is needed. A deal that includes the same reckless spending, however, is no deal at all.