Raising the Debt Ceiling Still Has Nothing To Do With "Default"

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As Ed Krayewski noted earlier, the Senate voted 81 to 18 for a short-term fix to the debt ceiling battle, and the House promptly chimed in. Many press reports describe the vote as last-minute-ish salvation from defaulting on the national debt. The Associated Press insists the "Senate has voted to avoid a financial default and reopen the government after a 16-day partial shutdown." The problem with this version of events is that, like a credit card holder refused a credit extension, the federal government would have defaulted on its debt only if it refused to pay the interest on its current tab.

The Congressional Budget Office notes:

If the debt limit is not increased before the extraordinary measures are exhausted, the Treasury will not be authorized to issue additional debt that increases the amount outstanding…

The CBO goes on to say that failure to increase the debt limit "could lead to delays of payments for government activities and possibly to a default on the government's debt obligations," but that's a big maybe even from the federal government.

Greg Mankiw, Chairman of the Council of Economics under President Bush, the second, and now chairman of the Department of Economics at Harvard University, told Reason:

My sense is that if the Treasury prioritizes debt service over other spending, then the bond market should not fear default on government bonds

Lawrence H. White, a former visiting scholar at the Federal Reserve Bank of Atlanta, professor of economics at George Mason University, and a member of the Mercatus Center Financial Markets Working Group said to Reason:

Reaching the debt ceiling does not imply default on 'full faith and credit' Treasury debt, because the Treasury has more than enough income to make the interest payments due on the debt.

Harvard University's Jeffrey Miron told us:

[T]here are certainly things they could do in the short term to manage it even if we hit the debt ceiling. For example, we could prioritize which payments we make. Every single day, we're paying interest or credit orders, social security checks, salaries of government employees, on and on and on.

Steven Hess of Moody's says:

We believe the government would continue to pay interest and principal on its debt even in the event that the debt limit is not raised, leaving its creditworthiness intact. The debt limit restricts government expenditures to the amount of its incoming revenues; it does not prohibit the government from servicing its debt.

And Reason columnist and Mercatus Center research fellow Veronique de Rugy points out:

[I]f the debt ceiling is not increased, the Treasury can prioritize interest and debt payment to avoid a default.

How is that possible? Because the federal government still pulls in much more in tax receipts than it pays out in interest to service the debt.

Raising the debt ceiling isn't about avoiding default. It's about freeing the federal government to continue its borrowing spree.

Comments

[Calidissident]

This meme is like the fiscal equivalent of Stand Your Ground laws and the Zimmerman case

[NebulousFocus]

Can we stop using “meme” to describe any concept whatsoever?

[Calidissident]

From Webster’s:

“an idea, behavior, style, or usage that spreads from person to person within a culture”

I think this clearly falls under “usage.” This is not an inappropriate use of the word.

[Corning]

I ate two meme’s for breakfast then fell in meme with a girl i saw on the elevator.

[mobius]

JD, I’m usually with you, but I think you’re really wrong here.

First, just because Treasury could theoretically, assuming a super-competent government, prioritize payments doesn’t mean that in practice it will be able to. You’re a libertarian! Your worldview would preclude the theoretical possibility of a perfectly operating Treasury Department.

Second, just because on a monthly basis, the feds bring in more tax revenues than interest due on govies doesn’t mean that on a daily basis this is true. Both interest outlays and tax revenues are fairly lumpy.

Finally, even if we don’t actually default, this situation can wreak serious havoc on the markets. Money markets could, after all, break the buck. Yes it is true, that in a libertarian paradise none of this would be an issue. But much to my chagrin we don’t live in one. We must deal in the world as it is not the one we wish it to be.

[Jquip]

First, a Treasury is where you store treasure. And that would make it possible even without super-competency. However, the US has a Debtury.

Second, you’re right. Which is what happens with Debturies. It’s almost like the Executive should try to put some back for known lurches in the bond rollover. Not a super competency, unless basic math is.

Finally, you’re right. The money markets aren’t infected with super competency, like… math. Or they’d be avoiding the issues arising from a US Debtury to begin with.

But that’s just begging the question: Why should anyone care if the buck gets more broken in the same way? Given 1913, 1933, and 1971, it’s a matter of time alone. Not a matter of option.

[Emmerson Biggins]

Uhh ya, you are 100% wrong. It has nothing to do with Libertarian paradise. Money In is greater than prinipal and interest out. Not saying they wouldn’t default outof spite. But a forced balanced budget in no way forces a default. At least not yet.

[Rob]

Not saying they wouldn’t default outof spite.

This is exactly what I believe would have happened had a deal not been reached. Jack Lew would not have prioritized debt service over other expenses, the government would default (maybe for just one day) and every news organization would pounce on the “republicans push U.S. off the cliff” story. No one in big media would ever point out how it was a conscious decision on the part of Treasury Secretary Jack Lew or President Barack Obama to refuse prioritizing payments toward debt service.

Our government is a stuttering clusterfuck of a miserable failure.

[Juice]

But I didn’t hear one Repub say this into one TV camera. All they had to do was say this a few times. “The only reason we will cave is because you in the media won’t point out that the Executive has the discretion necessary to avoid default. You will blame us entirely. That’s the only reason we’re caving before the so-called deadline.”

[wwhorton]

Bingo. And then, all of a sudden, we get a last-minute compromise that looks something like this. Of course, that could just be the wildest coincidence in the world. Or, it could be that the Repubs aren’t as interested in reducing spending as they are in establishing a precedent they’ll be able to use when they get back in power.

[Gilbert Martin]

What is most irritating about this is the slavish parroting of the “default” claim from national media on down to local media.

I can’t think of a single one of them that actually questioned the validity of this claim in any way or were the least bit curious about actually verifying it,

More and more the media is becoming merely a self reinforcing steno pool that faithfully amplifies whatever the Democratic party talking points are.

[Francisco d Anconia]

This

[Jquip]

Yellow journalism is a great blessing. When they hide it, it still is, but you don’t know it. When they don’t, or can’t, then you know that what CNN says is just correct as any random comment on Reason, Mother Jones, or Jill Random’s mommy blog.

[Sevo]

“The CBO goes on to say that failure to increase the debt limit “could lead to delays of payments for government activities and possibly to a default on the government’s debt obligations,” but that’s a big maybe even from the federal government.”

The CBO is not in charge of Obo’s PR department. Did you notice what happened to the nat’l parks under the ‘shut-down’?
Here’s what happened: Obo turned the brown shirts loose at great expense to keep people from enjoying what they owned, and ‘the people’ blamed the rethuglicans. That’s what happened.
Now you want me to believe that the same administration is going to prioritize expenditures in a way to *reduce* popular fright? J.D., you have ‘way more confidence in the federal government than do I.
Obo’s PR Dept (the national media) would play any default as the greatest economic failure the US has ever seen, ’cause rethuglicans. And Obo would use the powers the congress has yet to deny him to make sure there was a world-wide scream about the default, shorting every possible asset to find the loudest headlines possible.
And then Boehner would weep major tears, promise to give Obo anything he wanted for Christmas and head for the tanning studio.
That’s what would happen.

[blcartwright]

from the Bureau of Public Debt website (an agency within the Department of the Treasury)

“Our job is to borrow the money needed to operate the federal government and to account for the resulting debt. In a nutshell, we borrow by selling Treasury bills, notes, and bonds, as well as U.S. Savings Bonds; we pay interest to investors; and, when the time comes to pay back the loans, we redeem investors’ securities. Every time we borrow or pay back money, it affects the outstanding debt of the United States.”
http://www.publicdebt.treas.gov/

To my reading, it is this one agency that is responsible for the Constitutionally obligated pay back of the debt. All Congress would have to do is make sure the Bureau of Public Debt is fully funded, while everyone else gets haircut.

[Jquip]

There is no Constutional obligation to pay back the debt. T-bills are a contract, and the Federal Jurisdiction isn’t prohibited from telling bond holders to pound sand. They aren’t prohibited from screwing with the obligations of any contract at all.

See: Bankruptcy court, or Government Motors.

[blcartwright]

what about the 14A? “The public debt of the US shall not be questioned”?

I was arguing on Twitter last night with a friend who is a PhD economist and used to work for Labor, that contracts can be cancelled and entitlements rewritten, but he was insisting that not following through any any obligations would be illegal.

[Rob]

14A Section 4 :The validity of the public debt of the United States, authorized by law, […], shall not be questioned. […]

14A Section 5: The Congress shall have power to enforce, by appropriate legislation, the provisions of this article.

Am I misunderstanding something here? It would be within the powers of Congress to pass a law explicitly prioritizing payments to cover outstanding debts. I would like to see democrats vote against that and then continue to rail about defaulting on debts.

[JFree]

Blame for this falls squarely on the Republicans. If they can’t bring themselves to utter the phrase “balanced budget”; then it is not reasonable to expect a media poodle to do anything other than repeat the DNC’s spin on things.

[Rob]

No. Any reporter worth 2 squirts of shit, should be held to a higher standard than what you are suggesting.

[Beezard]

So “realistically” speaking, what’s the next step? Republicans over played their hand for no achievable goal, and marginalized what small government mojo they actually had working. Democrats basically pulled a gun on the American people and thanks to a friendly media came out looking like the sane ones.

What comes now? What’s next?

I guess we’ll find out in 3 months when this all happens again?

[Scruffy Nerfherder]

There is no next step for the federal government. It’s future is already written. There will be no solution that will bring us back from the edge of fiscal apocalypse because the American populace is only interested in balancing budget in theory. The practical implications of balancing the budget are too much for them to stomach.

The next step for the rest of us. Go about our lives, avoid large cash positions, invest in tangible goods like ammo. Oh, and get ready to bend over, for the tax man cometh.

[wwhorton]

Funny, I was just thinking that now would be a great time to start buying gold. Not commodities trading, though, like actual gold. I don’t think we’re quite at the stage of dumping currency entirely, but I’m pretty sure that if we keep at this trajectory the dollar won’t be worth dick in ten years.

[Will Nonya]

“I like the dreams of the future better than the history of the past” – Thomas Jefferson.

I imagine things looks a little brighter from where he was sitting.

[Jackand Ace]

Please stop with this lunacy, I’m begging you.

To argue about semantics and definitions as if that is of importance during this debacle is about as sophomoric as possible.

Let me get this straight…I know what the stance at Reason is regarding debt, that it is a catastrophe in waiting, and I agree. Is your argument now that the failure to pay back that debt is not so much of a problem? Seriously? In reality, that IS the problem! That is why we are concerned over debt!

I could not care less about whether or not we are TECHNICALLY in default. The minute we pass through the debt limit, someone is not getting paid. To suggest that the only thing of importance is whether or not the interest can be paid back is just ridiculous, and you should be ashamed to suggest that.

S&P says all of this has taken $24B out of the economy, and so these shenanigans by the GOP (and that is all is was) has added to the debt. That is what you should be concerned about, not definitions.

[Rob]

Is your argument that there isn’t a problem because more people are willing to buy our debt, so we should just issue more debt? That plan works as long as people keep buying our debt. I would rather see someone put their foot down and say enough is enough, than wait for the day to come when people really do lose faith in our ability to pay our debts.

The first option is painful, and it would take decades to clear our balance sheets. The second option however we wouldn’t have any control over, it would be swift, and immensely destructive. I’ll take an orderly bankruptcy over a sudden collapse any day.

[Jackand Ace]

Of course not…the deficit and therefore the debt should in fact be addressed through the normal channels of budgeting. To due it when the bills are due, and in the process increase the debt is insane.

I would suggest J.D. consider how much harm this has done to this country beyond the recognizable dollar hit ($24B): increased interest rates, reduced investment, lack of confidence in domestic markets, lack of confidence overseas. We have become the laughingstock oversea from this debacle. And they know another charade is due in ninety days. And J.D. wants us to be concerned with definitions. Please.

[wwhorton]

The problem is that they aren’t being reduced by “normal channels of budgeting,” and I think that’s the point JD is making here. The alternatives aren’t a.) not raise the debt ceiling, and b.) raise the debt ceiling while making difficult yet sound and responsible budgeting choices.

This is not the first time we’ve been down this road, and each time has looked the same: poormouthing from the Progs about their Keynesian spending projects and entitlement programs; claims that the government must borrow more money just to scrape by, for the bare essentials, and won’t do it again; get the ceiling raised; spending like drunken sailors.

If you really believe that the debt and the deficit are serious problems (as I do) you can’t just ignore the behavior of the government for the past several decades. That our government will suddenly, spontaneously develop a sense of fiscal responsibility is about as credible as a heroin addict who just needs one more hit before he goes cold turkey.

[Rrabbit]

That our government will suddenly, spontaneously develop a sense of fiscal responsibility is about as credible as a heroin addict who just needs one more hit before he goes cold turkey.

How many drug addicts do you think are sitting in Congress?

[Gordon Bombay]

How many people are in Congress again?

[Jackand Ace]

Here, read this from Germany:
http://www.thelocal.de/politic…..52181.html

Spiegel Online said “A superpower paralyzes itself.”
India, Great Britain, China…all saying the same, China going so far as to attempt to hasten the day when the dollar is no longer the reserve currency.

The damage we inflicted upon ourselves is only getting tabulated now. And we are set to maybe do it again. This is what all of us should be outraged about, not definitions.

[Almanian!]

Ohhh, noes! Germany and China don’t like us!

Fuck it. We’re over the cliff – let’s get there FAST!

[Juice]

I don’t get it. China would be up shit creek without the US economy and the dollar. We may need China, but they need us more than we need them.

[Rob]

So Spiegel thinks we’re paralyzed. I’d like to know what it is exactly thinks our government should be doing?

During the government shutdown there were still tens of thousands of soldiers stationed around the world, drones flying over a half dozen countries, NSA agents keeping tabs on their love interests, park rangers sent out to keep people from walk through parks. Even shutdown the government was doing too much.

The damage we inflicted upon ourselves is only getting tabulated now. And we are set to maybe do it again. This is what all of us should be outraged about, not definitions.

Nothing compared to damage being done every day by a government on an endless march to consume everything in its path. The government shutdown hurt the economy – according to the same people who stamped AAA grades onto mortgage backed securities in 2007. That $24B the S&P is worried about is like pissing in the ocean, it only represents 0.0015% of the U.S. GDP. If we don’t want the economy to be another plaything of pols the solution is really quite simple, start shrinking government.

[DarrenM]

If we continue to show how financially irresponsible we are, then yes, the dollar will eventually no longer be the reserve currency. One problem is foreign commenters not understanding the a government shutdown isn’t at all what they think it is as people wake up to the risks.

Also, foreign commenters misunderstand what *we* mean by a government shutdown. The government did not come even close to really shutting down, i.e., ceasing all government activity. This applied *only* to the Federal government. No state governments shut down and most of the Federal government continued to operate.

[thorax232]

So this is all a dog and pony show to get more money. They act like they’re hurting like a bum on the street perfectly capable of doing something productive.

[Rrabbit]

Did Reason get taken over by Ariana or Rupert? If not, why write such nonsense?

The interest on the debt is only a tiny percentage of expenses which the government cannot avoid without damaging its credit rating and what is left of its reputation.
Say, what would happen if this week’s social security checks are not mailed out? If the checks are sent out, but then bounce? If the Army would fail to put food on the table for the soldiers?

There exist government expenses which can be postponed without much harm. But claiming that anything that is not directly related to paying interest and principals on bonds is irrelevant is idiotic.

[wwhorton]

You’re absolutely right. We’d be totally in the black except for Social Security. Yep. That’s the one budget item that puts us over the limit, and we can’t cut that, so I guess we have no choice but to go deeper in debt.

Since there aren’t any government expenditures that could possibly be reduced in any way, and every single line item is equally important, and therefore cannot be prioritized.

[Rrabbit]

Social security can be cut. But the government cannot simply stop paying out. There would need to be a law passed which reduces social security, and that law then would have to survive various constitutional challenges.

[DarrenM]

I’d expect what would happen with SS (and perhaps other programs) is that increases due to inflation would be reduced. I think this is part of what this move to “chained CPI” is really about.

[Zoobs]

So I just heard on the way in to work on Fox News that the new Debt Ceiling compromise does not have an amount capped but does have a date that it needs to be re-negotiated. Why would the Dems need to come back to the table if they’ve been handed a blank check? Can anyone verify and substantiate this? If true, the GOP just gave away any hand they may have held to try to reduce spending.

[CatherineJLin]

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