Tuesday, October 8, 2013

Can the U.S. Actually Default on its Debt?

A new meme is beginning to emerge from some of the more hardcore conservatives in the GOP, particularly those in the Tea Party faction, claiming that it is not technically possible for the U.S. Government to default on its debt.  The thinking, if you want to call it that, is that since revenue to the treasury is forecast to be around $250 billion per month and monthly interest on the national debt is expected to be around $31 billion per month (see the president's 2014 budget here), then the treasury should have no problem paying the interest each month whether a debt ceiling hike is passed or not.  Technically speaking, they are absolutely right.  The problem, of course, is that the FY 2014 budget is estimated to be upside down by about $700 billion, or some $58 billion a month.  The treasury is then faced with a dilemma as to how to prioritize revenue outlays.  An additional problem is that the Treasury doesn't have the ability to prioritize payments the way a household might.  For example, a household could choose to pay the most important bills each month first (mortgage, auto, grocery, utility) and then pay the credit cards with what is left.  If the household comes up short, something doesn't get paid unless the household can take a loan to cover the shortfall...most households do this by making purchases on credit with the intent to repay it next month or over time. 

Treasury, however, does not have this luxury.  According to the wonkblog, the federal government receives some 2 million invoices a day for services purchased or debts owed.  Its computer systems are set up to pay invoices in the order received, whether that is grandma's social security check, a payment to a hospital for medical care provided, or an interest payment on a bond.  These invoices are not individually inspected by a human being but are checked by the computer for accuracy and then payment is sent.  There isn't a government accountant with a checkbook somewhere writing out and signing each of the 2 million or more payments processed every day.  Technically, it might even be possible for Treasury to reserve some cash to always pay the bondholders...but without the ability to borrow it would have to skip paying something else.  This could mean a government contractor owed a million dollar payment does not get paid.  He in turn does not pay his employees who respond by not paying the mortgage or car payment.  The consequences of sucking nearly $60 billion per month out of the economy would likely prove chaotic, even if the bondholders got paid. 

In short, what some members of the GOP are advocating right now is a horrible strategy likely to have ruinous consequences on an economy still struggling to pick up the pieces from the 2007-09 recession.  This could be enough to push it off the cliff and make that episode look like the 'good old days.'  That's why many in the business community, typically the GOP's stronghold, have had enough.  Many have begun siding with the president whose policies they have vigorously opposed in the past.  Some have even begun recruiting more moderate Republican candidates to oppose Tea Party darlings in GOP primaries next year.  Conventionally, many mainstream Republicans have avoided speaking out against Tea Party extremism for fear of being 'primaried' from the right next year.  It now appears that at least some Tea Party Republicans may face a challenge from the center.  That, in this writer's opinion, would be a welcome change and just might pull the GOP back from the cliff it seems intent to leap off. 

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