Chaos Yes, Default No
The federal government will not default, no matter what the demagogues say. Default would be an inability for the United States to meet the obligations of covering Treasury Securities and debts.
The mouthpieces for the administration are intentionally misleading the American citizens when they say that this would be a government shutdown with no way to pay debts. In truth if the debt ceiling is not raised, it does not mean that the revenue stream will dry up come August 2. On the contrary revenues to the Treasury will continue to roll in as they always do and the level of revenues will far outpace credit obligations.
The amount of interest on Treasury Securities that needs to be satisfied for the month of August is roughly $29 billion. Projected revenues to the Treasury far exceed that amount and are estimated to be $172 billion in a truncated period of time. These figures come from the Bipartisan Policy Center.
Would there be chaos in the markets or panic among those intimately involved? The short answer is yes. But will there ever be a better time to use this dilemma as an instructive tool to the perils of an overextension of debt and force tough decisions to be made? I think not.
As a country we are spending 44% more than we are taking in. If we were a family that had an income of $1,000 per month but spending $1440 per month, the bank would step in and cut off our credit.
That is what the Republican leadership in essence is doing. They realize there are a finite number of things that can be done with the level of revenue that Treasury takes in each month. They are telling the administration that there can be no more spending until cuts in spending are guaranteed. If taxes are raised, it will just allow the free spending to continue unabated until the increase in tax rates has the deleterious effect of shrinking revenues.
In the past as the Gross Domestic Product of the United States has grown, the ability to carry the heavy burden of an ever increasing level of debt did as well. However, with the latest downturn in the economy, the subsequent drop in revenues and the Keynesian approach to “growing” the economy has put the United States in a position where debt has reached an unsustainable level.
The reaction of the Obama Administration to this crisis is astonishing. The addiction to power, influence and historical immortality has blinded this White House. The demagogic rhetoric of class warfare continues unabated. The failed economics of misappropriated “stimulus” dollars should have been the wakeup call to the president’s economic advisors, but they are so blinded by ideology that their only response is to drive us further into debt.
I have doubts that those on the right will be able to sell their spending cuts to the American people as the president so far has been effective in pandering to his electoral base. He is likely to scare enough of those dependent on the federal government that substantial spending cuts will not be made. Or, if the cuts are made, they will likely take effect 10 years from now.
If there is an impasse, we will not default. We will experience a great deal of anxiety as determining who gets paid from the $172 billion funds is decided.
But this really is no different than the couple whose recent drop in income has led them to decide which bills they will be able to pay next month. They have just furnished their house with new appliances, furniture and televisions sets, but are now in a situation where they may need to return some of those goods and return to a standard of living that is within their means.