Treasury will always be able to make its debt payments

By Felix Salmon
July 27, 2011

I’m not sure where this meme originated, but people are saying with great confidence these days that Treasury has to borrow money just to pay the interest on the national debt. It simply isn’t true.

Here’s Michael Kinsley, last week:

Nobody knows for sure what will happen if Aug. 2 arrives with no deal made. But there’s good reason to expect the worst. The U.S. has fallen into the classic debtor’s trap of borrowing to pay the interest on previous borrowing. This means that even if we shut the government down completely, bills would still be coming in and interest payments would still be coming due, and we’d be unable to pay them.

And here’s Chris Wilson, today:

Here’s one way to express how catastrophically screwed the U.S. government’s finances are: If the entire U.S budget were cut to zero, effective immediately—the military, all entitlements, the electricity bill for the Capitol—there still wouldn’t be enough money to cover the payments on old debt that come due every day.

The fact is that Treasury can easily cover interest payments from tax revenues alone. We raise about $180 billion a month in taxes; interest payments come to about $30 billion a month. If the government shut down completely and did nothing but collect taxes and pay off the national debt, it would be running a profit of a good $150 billion a month.

Which is why I’m pretty confident that we’re not going to suffer a payment default on Treasury bonds. They’re called Treasury bonds for a reason: they’re issued by Treasury, which ultimately is going to make the determination about what payments to prioritize if the debt ceiling isn’t raised and we run out of money. Given the catastrophic consequences of a payment default on Treasury securities, those bonds will always have first priority — even if that opens up the White House to accusations of treating Chinese bondholders better than our uniformed military.

One confusion here might surround the difference between principal and interest payments coming due. When a principal payment comes due, that can be a huge amount of money — but when a bond is paid off, the national debt goes down by that amount. As a result, you can roll over the debt by issuing new securities, and not breach the debt ceiling. It’s only the interest payments which matter, unless the markets start refusing to roll over US national debt. And there’s no chance of that happening.

So when people talk about a US default, the reality is that the US is not going to make a payment default on its bonded debt. Instead, there will be other, weaker forms of default. The US sends out 200 million checks a month, and all of those are government obligations of one form or another. They’re not debt, in the way that Treasury bonds are debt. But they’re obligations all the same, and market confidence would indeed be rattled if the government found itself unable to make good on them. But that kind of confidence-rattling is nothing compared to what would happen if Treasury bonds started going into default.


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In the absence of a deal to increase the debt ceiling, the president can direct the treasury dept to continue to honor all of its debts, regardless of the laws. It’s his obligation to make sure the government does not default. I’m sure there are those who will disagree, but that doesn’t mean the president can’t do what he wants, it only means those people can sue the government for not abiding by the part of the constitution that they believe strips him of this power. Then that lawsuit can work its way through the courts. If they don’t fast track that case, it could be well after the next election before a decision is handed down from the Supreme Court.

Because Congress has authorized all of the spending and all of the tax cuts, the president is obligated, as chief executive, to ensure that the government pays its bills. Congress is obligated to pass a law enabling him to do so. There is no reason why there has to be additional legislation attached to the debt ceiling mod.

Posted by KenG_CA | Report as abusive

Finally some sanity on this issue. I’ve been rolling my eyes at pols and commentators saying the U.S. will default if the debt ceiling isn’t raised, when in fact there is absolutely no chance of that happening.

Posted by a.soffronow | Report as abusive

I agree, KenG_CA. Article 2, section 3, clause 4, requires the President “shall take Care that the Laws be faithfully executed”. Between the debt ceiling and the spending bill, the spending bill passed in the spring came later, suggesting a sort of override of pre-existing laws to the contrary. I believe, instead of halting spending, the President is in fact *obligated* to direct the Treasury to keep borrowing for this reason.

Posted by xuinkrbin | Report as abusive

Unfortunately, a.soffronow, a failure to miss any payments will lead to a downgrade of confidence in the ability of the US to pay its legal obligations (not just debt payments), which would be quite damaging to the US economy.

Posted by xuinkrbin | Report as abusive

TurboTax Timmy is probably making a list of who is naughty (Republicans) and nice (Democrats), checking it twice, and preparing for which line items in their districts will not be paid and which will be.

Posted by ErnieD | Report as abusive

So, Treasury makes the interest payments but does not have enough money to pay for other goods and services, which is exactly what the Tea Party has been arguing.

Posted by VinnyCatalano | Report as abusive

“So, Treasury makes the interest payments but does not have enough money to pay for other goods and services, which is exactly what the Tea Party has been arguing.”

- Huh? Well, yeah — that’s what a deficit implies. Not exactly a Tea Party discovery.

Posted by Thorvald | Report as abusive

Your headline is disingenuous to say the least. You left our one very important word: “bond.”

Unfortunately, that is not the only kind of “debt” the US is obligated to pay.

Also, I’m not sure the US creditors would necessarily agree that treasury bond debt takes precedence over their debt.

Now, if your are talking about debt taking precedence over government salaries and benefits, resulting in mass layoffs of government employees, I can buy your argument.

Nice try, but your story gets a failing mark for your lesson in journalism today, and that is because it lacks “truth.”

Posted by Gordon2352 | Report as abusive

By the way, Social Security has been legally defined as “property” by the Supreme Court in Mathews v. Eldridge, 424 U.S. 319, and hence a legal debt obligation to the US government.

Failure to do so would deprive Social Security recipients of their “property” without “Due Process,” which is a direct violation of the US Constitution.

Are you including Social Security in that calculation?

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