The US won’t default, even if the debt ceiling stays

By Felix Salmon
January 13, 2011
Greg Ip makes a very important point today, which I haven't seen made anywhere else: even if the US debt ceiling isn't lifted, that doesn't mean the government will default.

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Greg Ip makes a very important point today, which I haven’t seen made anywhere else*: even if the US debt ceiling isn’t lifted, that doesn’t mean the government will default.

In any given month, the government’s income dwarfs its debt-service obligations, which means that the government could simply pay all interest on Treasury bonds out of its cashflow. Greg hasn’t run the numbers on principal maturities, but I’m pretty sure that they too could be covered out of cash receipts—and when that happened, of course, the total debt outstanding would go down, and we wouldn’t be bumping up against the ceiling any more.

The point here is that the government has enormous expenditures every month, and debt service constitutes an important yet small part of them. If the debt ceiling weren’t raised, it stands to reason that just about any other form of government spending would get cut before Tim Geithner dreamed of defaulting on risk-free bonds.

Some of those spending cuts could be implemented almost invisibly. For instance, Social Security runs a surplus for the time being; it invests that money in special non-marketable Treasury securities, which count as Treasury debt. If the Social Security trust fund accepted instead just some kind of promise of a top-up at a later date, that could save billions of dollars right there.

Beyond that, large defense contractors aren’t going to stop working for the government just because they’re late in being paid; neither are doctors, hospitals or most of the rest of the healthcare industry.

But maybe the smartest thing for Geithner to do would simply be to stop paying the salaries of members of Congress and their staffs. It probably wouldn’t take long, in that event, for Congress to vote Obama the debt-ceiling raise he needs.

The bigger picture here is that the US government, like any other company or individual, has enormous freedom when it comes to which creditors it chooses to pay when. Just like GM had every right to privilege some creditors over others, even when those creditors were legally pari passu, the US government can do exactly the same thing. And there’s no way that this administration, or any other that I can think of, would choose to cut debt service given that they have every choice in the matter.

*Update: Which doesn’t mean the point wasn’t made earlier elsewhere, of course. Stan Collender made it in his Roll Call column, which he posted on his blog here. Apologies, Stan, for missing it.


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So, in theory, Treasury could simply choose to defund the Afghan war?

Posted by mushr00m | Report as abusive


Actually, The Bernank would let TurboTax Timmy post the country of Afghanistan as collateral so that he could access the Fed window and borrow whatever he wants.

Posted by ErnieD | Report as abusive

It seems difficult to sustain Felix’s argument that the Executive Branch’s power faithfully to execute the laws gives Tim Geithner (or Obama) the power to not faithfully execute the laws when he doesn’t feel like it. If Congress has appropriated funds to pay US debts, defense contractors, to say nothing of its own salaries, the Executive Branch must carry this out, and do so according to Congress’s wishes, not its own. See the “Rehnquist Memo.”

Posted by maynardGkeynes | Report as abusive

Felix, Felix, Felix. Check a bill in your wallet before you write a blog entry about this sort of thing, next time. The Secretary of the Treasury and the Treasurer of the United States are not the same person. Timmy don’t sign the checks.

Besides which, it is difficult to imagine a situation that would empower Republicans and completely immobilize the Democrats more than if the executive branch sought to strangle the legislative branch of money. We’d have a full-on Constitutional crisis and I doubt very much whether the executive would prevail.

Posted by RobSterling | Report as abusive

Stan Collender has been talking about this for a while. All true – doesn’t mean we default (still not good though). n-collender/2104/dont-believe-scary-word s-you-hear-about-debt-ceiling

Posted by renter | Report as abusive

Actually, Sterling, I have a $20 bill signed by Timmy right here in front of me.

Our economy is falsely positive because it’s credit-based – a house of cards. I predict we will default on the U.S. treasury securities held by China. Our indebtedness is pathological, and it will be our undoing unless we live within our means. We should drastically lower the debt ceiling and adjust to the consequences. Hey, America: Trim your spending, your waistline, your debt and your ego! And brush up on your Mandarin.

Posted by trailrunner | Report as abusive

Interesting suggestions – and perhaps Geithner will have to consider it. As to Social Security, though, this actually happened once before. In ’86, there was a debt ceiling logjam and then-Treasury Sec James Baker began cashing in the Social Security trust funds’ Treasury bonds to pay the bills. Moynihan made a huge stink, claiming the trust funds were being raided. Baker very quickly replaced the bonds. This is still the only time that the Social Security trust funds were ever actually “raided,” contrary to the mythology about them. I expect if Geithner tried something similar, he’d get a lot of flack as well – from Democrats.

Posted by Laursene1 | Report as abusive

trailrunner: we are on fiat money, we can only default if our politicians choose to do so. Almost no one has any idea what Federal “debt” is on a fiat currency. On gold, the mercantilist policies of our trading partners would have gained them all of our gold. We are not on gold. Our trading partners hold IOU’s that they can only redeem in the US economy. They will need to figure out how to help us be productive again or have to write off the income from all of the goods they have shipped to us: we ended up with the goods and the standard of living to go with them while they end up with IOU’s that are worthless within their own economies. We can write as IOUs as long as they continue to steal the wealth of their people and send it to us, paid for by their purchase of our bonds. For more see:

Posted by jnewman | Report as abusive

Yes, the US will not default, but this post does not argue the point well.

You essentially say the US will not default because such a default would be voluntary.

But most actual defaults are voluntary. For example, an insolvent municipal government could in theory make interest payments by stiffing its police and fire departments. That doesn’t happen. Cities choose, with good reason, to default instead.

I’m also concerned that readers may misinterpret the post to mean that the federal deficit, currently over 60% of gross receipts, is not an urgent problem. I’m sure that’s not what you intended.

Posted by zipflash | Report as abusive

Social Security is still running a surplus?

Posted by threeRivers | Report as abusive

Not a significant surplus at this point.

The surplus was only large for half a dozen years, smack on top of the Bush administration. I suspect that is how they funded the tax cuts.

Posted by TFF | Report as abusive

I’m going to quote nbywardslog’s link above and just say
Oh my goodness, brace yourselves people.

“If Berlin and Paris hold the line on this, the Eurozone is dead. And the contagion from such a consequence will be horrific. Not even Bernanke has the QE clout to inflate US equity markets in the face of a selloff caused by an end-game EU debt crisis. He’ll have no alternative but to focus on saving the financial system. The brakes will come off gold, and the Dow will plunge.

Don’t believe anyone who tells you otherwise: the Sarkozy-Merkel hardball on bailout funds will guarantee a collapse in the euro – and in equities just about everywhere.

Posted by limapie | Report as abusive

I totally disagree with this article. The U.S. is going to lose it’s status very shortly to China as the world’s number one economy. Our ballooning national debt and continued trade deficits are going to get worse because our economy is not going to be able to grow quickly enough to generate budget surpluses. America has been given a free ride by the expansion of the dollar and its use in worldwide commerce – but that is changing. Just look at the decline in the dollar in the last 10 years. Combine that with many underfunded government programs, blank checks for Fannie and Freddie, an oil based economy, unlimited QE and you see that we are on a collision course. Just wait until inflation kicks in and interest rates start going up. Don’t believe me? Then I’ve got some AAA rated subprime bonds I want to sell you at par. Obama is a one-term president who has failed to address the many problems of our nation. America please wake up.

Posted by dshelley25 | Report as abusive

Must be missing something. A social security fund full of IOUs for treasury debt is a surplus? Following that logic, when my checkbook runs dry I can just buy a T-bill with money I don’t have and run a surplus again. No matter how much political and financial mumbo jumbo you use, a debt is still money WE DON’T HAVE. What say we try having every one pay a fair tax and stop spending what we don’t have. On the other hand, I’m sure China would be willing to forget that it owns a third of our GDP and just tell us to forget about that pesky debt thing.

Posted by justsayin2011 | Report as abusive

The idea that the US can easily afford to pay the interest on borrowings is premised on the AAA credit rating and low interest rates. Try re running the numbers at 6% interest like other over indebted nations have to pay. The extra interest causes even more debt and even higher interest rates.

Posted by Sinbad1 | Report as abusive

justsayin, I think you misunderstand the situation.

Social Security is funded by the Social Security tax. For the last twenty years, the revenues from Social Security taxes have been greater than the payments. That is a “surplus” by any definition, at least for Social Security itself. For a half-dozen years the surplus was quite large.

However the Social Security cash flow is now transitioning from surplus to deficit. In theory the deficit can be covered for another 30 years by cashing in those Treasury IOUs that you mention. In practice, the Treasury may have trouble redeeming the IOUs. But your comments are confusing the cash flow and the balance sheet.

A better analogy…

You find yourself short on money, so you “borrow” against your 401k. You continue to make retirement contributions, but you immediately borrow that surplus back again to spend.

It is true that in this analogy you do not have any actual assets (just IOUs that you will have trouble redeeming) in your 401k. But your 401k isn’t in debt, it simply doesn’t have anything of value to fund your retirement. It is “money we don’t have” but it is also “debt we don’t have”.

Posted by TFF | Report as abusive

RobSterling makes a decent point: If the main consequence of a failure to raise the debt ceiling is that the administration has to make an ongoing series of painful cuts to keep paying its bills, all the incentives for Republican members of Congress will still be to vote against raising the debt ceiling.

GOP reps want to get the credit for shrinking government without copping the criticism for cutting specific programmes. This situation would give them exactly that situation, with the administration facing an escalating series of Sophie’s Choice moments on spending cuts–decisions for which it, and it alone, would be seen as responsible–until it gives in to whatever concessions the GOP would demand in return for finally raising the debt ceiling.

I don’t see this administration responding by just targeting programmes that Republicans like: they have taken such pains to appear centrist and reasonable, why throw that all away with a set of cuts that would look vindictive?

It’s much more likely that if we got to this point, the first stuff to go once accounting gimmicks, phantom surpluses etc are used up would be stuff that appeals more to Democrats than Republicans. That way independents would see Obama as being ‘fair-minded’.

So I guess we might not have a default, but I think the period after the debt limit runs out could be more drawn-out and painful than people are anticipating.

Posted by vanityvehicle | Report as abusive

In 2006, Amanda began to serve as the executive director of her local NAMI (National Alliance on Mental Illness) affiliate and in 2007, she founded Florida Borderline Personality Disorder Association 501(c)(3) organization dedicated to BPD education and awareness.