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Saturday, January 12, 2013

Obama's Phony Default Drama!

The United States of America isn’t going to default on its debt, even if Congress doesn’t increase the statutory borrowing authority in the next couple of months. Everyone in Washington knows, or should know, this. Any assertions to the contrary are tantamount to (perish the thought!) playing politics with the debt ceiling.

This is the second time in less than two years that the nation finds itself at this juncture, with Republicans in Congress threatening to hold the debt ceiling hostage. Some lawmakers are willing to shut down the government in order to pressure President Obama to agree to spending cuts.

A shutdown is certainly possible. A debt default? Not gonna happen.

Why? Because the income taxes withheld from most of our paychecks each month exceed the interest the Treasury owes on its debt outstanding. In November, for example, the Treasury’s interest expense totaled $25 billion. That compares with tax receipts of $161.7 billion. The ratio varies from month to month, but what comes in more than covers what goes out in debt service.

Without an increase in the $16.394 trillion debt limit, the federal government can’t pay all of its bills: It borrows 40 cents of every dollar it spends. Still, “debt service would come first,” said Lou Crandall, chief economist at Wrightson Icap in Jersey City.

Wait. The Treasury claims it has no authority to prioritize payments, to pay bondholders first.

That’s what it says, yes. Others beg to differ. In response to a congressional inquiry on the issue in 1985, the Government Accountability Office concluded the following: “We are aware of no statute or any other basis for concluding that Treasury is required to pay outstanding obligations in the order in which they are presented for payment unless it chooses to do so.”

The GAO is equally unaware of any new law that would alter its opinion in any way. So repeat after me: The United States isn’t going to fail to make timely payment of principal and interest on its sovereign debt. If it can’t issue new debt, it can roll over maturing debt.

Borrowers may very well demand a higher rate of interest, especially if Obama and Treasury Secretary Timothy Geithner raise the specter of default, as they did in 2011.

Issuing such a threat is irresponsible and even counterproductive if it prompts bondholders to dump Treasuries. That’s what happened initially during the debt-ceiling negotiations in July and August of 2011, costing the US Treasury an extra 1.3 billion in interest expense, according to the GAO.

Once Standard & Poor’s put the United States’ AAA rating on credit watch on July 14, stocks went into the tank and Treasuries ignored the downgrade threat, which became a reality on Aug. 5.

“The bond market has its own credit-rating system,” Crandall said.

I am not suggesting that a failure to raise the debt ceiling wouldn’t be disruptive or cause undue hardship to those who rely on government checks. Social Security payments might not get processed. Medicare and Medicaid providers wouldn’t get paid. Neither would those serving in the military.

The sad part is that the debt ceiling has nothing to do with the debt problem. It merely allows Treasury to borrow what Congress has already spent. It does not authorize new spending commitments.

Options to get around the statutory debt limit, such as invoking the 14th Amendment or minting a $1 trillion platinum coin, seem like a bad precedent (the former) or a gimmick (the latter) to circumvent a relic. Neither is likely to be implemented.

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