Wednesday, October 9, 2013

Interesting stuff on talk of default. Concerns of dire consequences over a default aren't based on fact.

President Obama and others in his Administration are ratcheting up their rhetoric, raising the specter of a default by the federal government on debt it owes.  This post by John Hinderaker says that's merely irresponsible talk.  
One remarkable aspect of the shutdown/debt limit battle is the irresponsibility (on the part of the Obama administration) and incompetence (on the part of the news media) concerning the claim that the federal government will default on its debt obligations if Congress fails to raise the debt limit. President Obama and his minions have clearly suggested that default is a real possibility:
“As reckless as a government shutdown is … an economic shutdown that results from default would be dramatically worse,” Obama said on Thursday. Clearly targeting Republicans, he said a default would be “the height of irresponsibility.”
Then, on the same day, Obama’s Treasury Department released a brutal statement that said a default would prove catastrophic, causing credit markets to freeze and leading to “a financial crisis and recession that could echo the events of 2008 or worse.”
Within the last few hours, Obama repeated that Congress must “remove the threat of default and vote to raise the debt ceiling.” 
Hinderaker says there's no threat of default because the federal government must pay its debts based on the US Constitution.
But there is no threat of default. Constitutionally, the federal government must pay its debts. The Fourteenth Amendment, Section 4, states:
The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.
I believe this provision is universally understood to mean that the federal government must pay its debt obligations, both principal and interest, even if that means prioritizing debt service over other government spending. So the question is, if Congress does not raise the current debt ceiling, will the federal government run out of money needed to pay its existing debts? The answer is clearly No. A reader supplies the math:
On average the federal government’s daily expenditures are about $16.7 billion; receipts are about $14 billion, implying an average daily borrowing requirement of about $2.7 billion. So the planned flow of revenues is now about $650 billion less than the planned flow of expenses…about $2.7 billion a [business] day, $650 billion annually.
So the “default” scenarios are bogus. Interest on the $16 trillion in debt is covered by a factor of about 10x by revenues! That puts the federal government deep into AAA land. Revenues would have to fall by a staggering 90% to jeopardize interest payments.
And, of course, retiring principal by “rolling over” maturing debt can never require an increase in the debt ceiling, since there is no net increase in the nation’s debt, even if the money used to repay the original principal is borrowed.
He points out that what is at risk is reducing government spending.  If that's the case, then it's understandable why President Obama is raising the rhetoric level.  The failure to raise the debt ceiling means government spending will need to be reduced.
So what will actually happen if Congress doesn’t increase the debt ceiling by approximately October 17? The government’s debt obligations will be paid, but reductions in other spending will start to become necessary. In effect, leaving the debt ceiling as is would function as a spending cut. This is why the Democrats hate the idea so much. They know there is zero chance of default, but they are horrified at the prospect that voters and taxpayers may find out that there is a relatively simple way to bring about spending reductions that would create, in effect, a balanced budget. Hence the hysteria.
To be fair, some Republicans, including John Boehner, have also made public statements that support the plausibility of the default threat. Don’t ask me why. Others, like Rand Paul on yesterday’s Meet the Press, have tried to set the record straight:
NBC: Very quickly before I let you go. As you well know, there is a debt ceiling vote on the horizon. Will Republicans let this country go into default?
SEN. PAUL: I think it’s irresponsible of the president and his men to even talk about default. There is no reason for us to default. We bring in $250 billion in taxes every month, our interest payment is $20 billion. Tell me why we would ever default. We have legislation called the full faith and credit act and it tells the president, you must pay the interest on the debt. So this is a game. This is kind of like closing the World War II memorial. They all get out on TV and they say, we’re going to default. They’re the ones scaring the marketplace. We should never default.
Hinderaker suggests getting government spending under control will actually boost the economy. Though the unknown is whether the markets might panic. Of course, I recall the dire predictions of catastrophe with the supposed financial cliff facing us last January.  The dire claims then never materialized.
There is only one kind of default: the “technical” kind. Cutting spending is not some other, “non-technical” type of default. And as for the impact on the economy, many economists believe that getting government spending under control is the best thing we can do to boost economic growth.
So next time you hear hysterical talk about default on the news, remember that those who raise the default specter either have no idea what they are talking about, or are trying to fool the uninformed.


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