Courtesy of Mish.
Of all the over-dramatized nonexistent threats, the silly worry of the day is the US is at risk of default if Congress does not raise the debt ceiling.
Earlier today, I saw a couple of articles outlining how and why a US default could happen. Well, it won’t, and there is no need for all the surrounding drama either.
Ending the Debate Drama
The best rebuttal to the default idea comes from Bloomberg columnist Caroline Baum in her article Obama’s Default Drama Is No Way to Run a Country.
The United States of America isn’t going to default on its debt, even if Congress doesn’t increase the statutory borrowing authority in the next couple of months. Everyone in Washington knows, or should know, this. Any assertions to the contrary are tantamount to playing politics with the debt ceiling.
A shutdown is certainly possible. A debt default? Not gonna happen.
Why? Because the income taxes withheld from most of our paychecks each month exceed the interest the Treasury owes on its debt outstanding. In November, for example, the Treasury’s interest expense totaled $25 billion. That compares with tax receipts of $161.7 billion. The ratio of receipts to interest expense varies from month to month, but what comes in more than covers what goes out in debt service.
Without an increase in the $16.394 trillion debt limit, the federal government can’t pay all of its bills: It borrows 40 cents of every dollar it spends. Still, “debt service would come first,” said Lou Crandall, chief economist at Wrightson Icap LLC in Jersey City, New Jersey.
Politics of the Debate
The idea of a default should end right there, but it won’t. Here is a likely seven-point scenario.
- Obama will chastise Congress with talk of financial Armageddon if Congress does not raise the debt ceiling.
- Congress will pretend to hold the president hostage
- The secretary of the Treasury will get into the act with its own version of the default debate
- Perhaps a few payments on non-critical budget items will be temporarily skipped
- Wall Street will feign panic
- Constituents will pressure Congress to approve a new debt ceiling
- Congress will raise the ceiling with another useless warning about next time
What’s Wrong With the Debt Ceiling?
Yesterday Baum wrote Only Thing Wrong With the Debt Ceiling Is the Lag. …
