Will a failure to raise the US debt ceiling force a default?

mheslep

As it happens the legislative branches of the US government have long established a periodic legal limit on the Treasury's ability to raise revenue by issuing debt. I'm told such a limit is somewhat unusual as nations go, but there we are. This year the US Treasury predicts that the current legal ceiling could be reached as early as March 31, forcing a vote on the matter soon. Recently, Secretary of the Treasury Geithner sent a letter to Congress to impress upon that body his opinion of the consequences of a failure to raise the debt limit yet again. The letter was no doubt prompted by the greater than usual clamoring from Senators and Congress persons who have voiced serious reservations about raising the debt limit this time, especially from Tea Party connected freshmen[1]; their reservations in turn prompted by the debt increase over the last decade, and now dramatic increase debt and spending in the last two years. The fact that formerly Senator Obama voted in 2006 against raising the debt limit (then $9 trillion, now asking for $14.3 trillion) and losing only 48-52, gives today's Senators more political maneuvering room.[2][3]

Any number of threads could be opened on the various consequences of this issue, many already have been. I'd like to confine this one to a particular one of Geithner's predictions that the Treasury would be forced to default on legal obligations of the United States . After a quick look at the budget numbers it is not clear to me that this must be so:

Revenue: $2.2T
Spending: $3.5T
Deficit: $1.3T

That is, federal government takes in less than $200B per month via taxes. However, the interest on the debt is less than $20B per month. So while the Treasury and the US Government would have to immediately find some ~$100B/month in cuts given a freeze in the debt ceiling, the Treasury need only default on debt if it chooses to do so: continue to eat out and blow off the last notice from the creditor, or stay in and eat mac and cheese.

[1] Senator Rand Paul (Ky) today. http://thehill.com/blogs/blog-briefi...rule-on-budget
[2] http://blogs.abcnews.com/politicalpu...-todays-q.html
[3] From Senator Obama's floor 2006 speech. http://rpc.senate.gov/public/_files/...ncreasev20.pdf

WhoWee

I think the Republican should negotiate a short term extension of 2 to 3 months. The initial agreement could structure an outline of spending cuts and monitoring by the CBO. At each 60 - 90 day renewal meeting, progress can be verified and additional cuts enacted. It's the only way to force responsible behavior and get everyone onto the same page.

mheslep

Before we get into what might be done, I'd like to establish what will happen regards existing debt payments, i.e. everybody's T-Bills, should nothing be done.

WhoWee

Maybe they can start handing out shares of GM and land titles - lot's of Government owned real estate - but mineral rights might be a little tricky.

I'm glad you posted about Obama's record on this issue. It's time to force him to the table and get serious - ask him who should not be paid?

To directly answer your question, my guess is those are annualized numbers? Increased (not sure this year will be ???) January - April collections MIGHT buy them a few weeks time? As far as I know, cuts or default would be the ONLY options. Accruals, renegotiation of the timing of payment, printing money, holding back tax refunds and EITC payments, and any other clever cash management tricks would still realize an increase in debt.

Vanadium 50

Fundamentally, the problem is that Congress has passed mutually contradictory laws. Taxes are this much, spending is that much, and the debt ceiling is a third number: and it doesn't add up.

Traditionally, the solution is for it to go to the courts. There are two possibilities I consider likely. One is that the courts decide that the last bill passed supersedes the previous ones, which effectively removes the debt ceiling. The other is to order the executive branch to follow some court-mandated budget.

Al68

Of course failure to raise the debt ceiling doesn't automatically cause default. It causes government to choose between honoring its debt and spending on other things.

Personally, I think it's disgusting to talk about this as if it were a mere formality, and there is no option but to raise the debt ceiling. It's not like limiting government spending to the obscenely high amount it takes in is not an option.

Vanadium 50

Yes, but that was an option considered and rejected by the 111th Congress. And now that they have rejected it, a very good question is "What will happen".

mheslep

Refusal to raise the debt ceiling would cut spending but it would be a disastrous way to do so, a complete (long term) failure of the legislative branch. This would not be same as as the controlled government shutdown in the 1990's, where some parks closed and some government employees remained home. Without some kind of minimal legal fiat as to what to spend on, anything can happen: no military paychecks, no FBI paychecks, no Social Security paychecks, and yes the Treasury might choose to default on debt payments. All that could happen, absent Congress legally choosing some percentage, and where, to cut.

Still I'm not so sure we can waive away Sec. Geithner's assertion that a default would be forced, perhaps we're missing something.

WhoWee

Has anyone found a legally mandated priority of payments list?

Al68

That's a good point, failure to raise the debt ceiling would force spending cuts, but the President would have complete power over the details, since congress has effectively authorized all the individual spending items, and the debt ceiling only applies to the total.

And he could choose to spend revenues on other things, if he decides they are more important than honoring legal debts of the U.S.

mheslep

There you go, if such a thing already existed it could force debt defaults.

WhoWee

I would assume national defense spending would be the primary category protected - followed by (low risk) secured Government obligations.

mheslep

Essay today by Senator Pat Toomey. Doing the math shows that a debt default is not inevitable from a debt ceiling cap.

But theoretically with no legal direction as to where to spend revenue a default is possible, therefore:
Just as discussed up thread. Clearly the Senator reads PF.

WhoWee

well done

talk2glenn

By definition, the entitlements are legally required (mandatory) expenditures, and would have to be paid first. Interest payments and discretionary spending follows.

The problem is, entitlement spending makes up the lions share of government outlays. You could say that virtually the entire Federal Government (its employees, agencies, departments, etc), including defense and law enforcements, are paid for by borrowing, with all of its tax revenues going to pay for the mandatory programs (handouts and entitlements).

So, if the Treasury couldn't borrow, you'd effectively have to shut the Federal government down - there wouldn't be enough money left over to fund discretionary programs after the entitlements and interest was paid for.

This is the problem Republicans face. There are short-term mechanisms to avert a crisis. You could avoid a government shutdown by funding its operations today, and deferring mandatory payments until the absolute deadline (sort of like putting off paying a credit card until the due date), but this doesn't change the calculus, it only makes the game of chicken last longer.

mheslep

From everything I've read regarding the term mandatory in reference to budgetary spending, it refers only to political priorities and the long length of time surrounding the entitlements. But of course everything the congress appropriates and the President signs becomes a matter of law. That is, paying an FBI agent or buying a Destroyer is every bit as legally required as is mailing out a social security check. The question then is does Congress have any specific priority list in place should funding, taxes or borrowed, be inadequate? The answer seems to be no, given Senator Toomey's explanation for his pending legislation doing exactly that for debt interest payments.

CAC1001

I think the Republicans will raise the debt ceiling at the end. Some commentators have suggested what WhoWee said, that the Republicans ask for sizeable, but reasonable, spending cuts, and if only small cuts are offered, only raise the debt ceiling for a few months, so then we have the discussion all over again. If reasonable cuts are given, extend it out longer.