StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



Greg Ip and Felix Salmon Join "A Default Isn't Mandatory If The Debt Ceiling Isn't Raised" Club

14 Jan 2011
Posted by Stan Collender

Over at The Economist, Greg Ip does a nice job providing some additional details on what I posted earlier this week: Contrary to what some are saying, not raising the federal debt ceiling when it's reached later this year doesn't mean the government automatically will default on its debt.  To the contrary, the Treasury has a number of money management techniques available to it to avoid a default even if the debt ceiling isn't raised and...as Greg notes...is very likely to use them.

Meanwhile, over at Reuters, Felix Salmon says that Greg is right and that he hasn't seen the default-isn't-mandatory argument made anywhere else.  I congratulate Felix for joining the club and will send him the link to my post shortly.

 

 

The numbers used by Greg Ip

The numbers used by Greg Ip wrt interest expenses appear very low, probably ignore interest on the non-marketable debt held by the trust funds.
Felix Salmon claim that the SSA runs a surplus must be qualified, the SSA runs a deficit excluding interest income, which is paid with IOUs subject to the debt ceiling and therefore reducing the Treasury capacity to roll over marketable debt.
But the point is right, not increasing the debt ceiling doesn't imply default.
The market just has to roll over debt and believe that the US gov. can cut its expenses overnight by 40%. Good luck with that.


That is correct

I don't think that anyone has made the argument that the instant the debt ceiling is reached, the government will automatically default. That's just a strawman.

There are a number of actions the government can take to continue funding operations in the short term, as Stan has commented on.

However:

The FY10 deficit is ~1.6 Trillion.
FY10 total federal government spending is ~3.7 Trillion.
The deficit is over 43% of spending.

Once the debt ceiling is reached, the government has maybe a month or two before it has to stop paying vendors, stop paying non-essential workers, and curtail Social Security payments.

That will buy it maybe another month or two before default. Once the debt ceiling is reached, default is ABSOLUTELY INEVITABLE unless the government can miraculously double tax revenues or cut spending in half over the course of 3-4 months, and both are impossible for all intents and purposes.


Not necessarily

Theoretically Default is NOT inevitable. Based on your numbers the Govt has receipts of $2.1 Trillion. As long as these receipts exceed interest payments (currently about $200bn) for the year the government can function indefinitely (or for a very long time) by rolling over debt. Of course this will come at the expense of payments to retirees, vendors, federal employees, military. The outrage that will result from bondholders getting paid ahead of everyone else is what makes this situation unrealistic.


Not feasible

I'm not sure where this idea that the government can just stop paying its employees, vendors, and everyone else to whom it owes money except bondholders. If we looked at a business, we would not say that it could cease to make payroll and stop paying its suppliers and still remain afloat so long as it was able to roll over its existing debt and continue to make interest coupon payments. That business would be in bankruptcy court long before it got to that point.


Isn't this a "let's stiff

Isn't this a "let's stiff everyone but the bondholders" strategy?


Government's often do pay

Government's often do pay vendors with IOU's during budget crisis. Employees are furloughed to save money. See recent precedents from CA and IL. I agree with you that a private business would get sued immediately but Government's seem to get away with it all the time.




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