The US won’t default by default, by Sam Wylie

I don’t get it.  Why would a failure to raise the US debt ceiling necessarily cause a default by the US Treasury?  If I was unable to borrow any more money from my bank, I wouldn’t then immediately go into bankruptcy.  If my spending exceeded my income then I would need to earn more or spend less, but I wouldn’t declare bankruptcy.  So it is with the US Treasury.

The Congressional Budget Office explains the size and type of its inward and outward cash flows here.   The debt ceiling is currently $16.7 trillion.  There is no problem with rolling over this debt as it matures — that does not increase the total debt.  The problem is that  US is running a budget deficit of between 50 and 60 billion dollars per month.  This is what needs to be financed with new debt.

The Treasury receives about $7 billion per day in the payment of income taxes and payroll taxes.  That cash is received as a smooth flow.  Corporate tax payments and other payments are more lumpy, being received quarterly.  Obviously the Treasury has even larger outgoings than receipts, including over $100 billion per month on medicare, social security and military wages.  Interest payments are about $35 billion per month.  To prevent a default the Treasury needs to balance the budget immediately.  That means that outgoings have to go down by 50 to 60 billion per month.  That could be managed by cutting payments to many different sources, not just medicare, social security and military wages.

At the end of the document linked to above, the CBO says  “By CBO’s estimate, depending on the amount and timing of cash flows, the Treasury might be unable to fully pay its obligations anytime from October 22 on.  Which of the government’s various financial obligations would be paid and which would not be paid is unclear.”

The point is that there is no hard and fast date at which the US Treasury will default on payments to the holders of Treasury bills, notes or bonds.  If the debt ceiling is not raised before mid October, then yes there will be a train wreck, but it will be a slow motion train wreck.  The Treasury will stop making payments to social security recipients, which will bring unbearable political pressure on Washington to reach deal.

Comparisons with Lehman Brothers are not apposite.  Lehman Brothers was an unexpected and high impact train wreck.  That is not the case here and that is why the markets are so sanguine about the developing crisis.  See this comprehensive discussion of the issue by the Bipartisan Policy Centre.

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This entry was posted in Economic Sustainability via a Global Footprint, Economics and Finance. Bookmark the permalink.

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