A voice of reason emerged today among the doomsday predictions over a U.S. government default if the debt limit is not raised by mid-October. The Washington Post reports that Moody’s, a top credit rating service, suggested that hitting the debt limit does not mean the U.S. would default:
“We believe the government would continue to pay interest and principal on its debt even in the event that the debt limit is not raised, leaving its creditworthiness intact,” the memo says. “The debt limit restricts government expenditures to the amount of its incoming revenues; it does not prohibit the government from servicing its debt. There is no direct connection between the debt limit (actually the exhaustion of the Treasury’s extraordinary measures to raise funds) and a default.”
In recent weeks, President Obama and Treasury Secretary Jack Lew have made the rounds, arguing vociferously that if Congress does not raise the debt limit by October 17, the U.S. could default and “economic chaos” would ensue. The Treasury Department put out an entire report on the damaging consequences of a government default. The President even went so far as to call it an “economic shutdown” and began scaring seniors, suggesting that their Social Security benefit checks wouldn’t arrive on time.
Unless President Obama deliberately chose to default, there are at least three reasons why the U.S. will not default on its debt:
1. Revenues. Treasury will collect more than enough revenue in fiscal year 2014 to meet all debt obligations and most non-debt obligations on an annualized basis. Interest payments consume less than 10 percent of revenues, and even if interest rates rose, the U.S. would still be able to service its debt.
2. Prioritization: The Treasury and President Obama have discretion at the debt limit to prioritize payments in the best interest of the nation. Treasury could hold some cash reserves to ensure debt obligations are met on time, prioritizing debt payment above all other spending. Some non-debt payments would be delayed during a debt limit impasse.
3. “Assets.” Nearly one-third of the federal debt subject to the limit consists of intragovernmental debt, or debt which federal agencies have incurred amongst themselves. Redeeming bonds in government trust funds frees up room under the debt limit to borrow additional cash to meet obligations.
There is even a trump card. The Full Faith and Credit Act, H.R. 807, which passed in the House of Representatives, would allow the Treasury to borrow funds as necessary to meet debt obligations.
With the risk of default on the debt almost nil, what should lawmakers do on the debt ceiling?
The debt limit presents a decisive moment for Congress to take charge of the automatic spending increases that are driving the U.S. spending and debt crisis. Congress should cut spending and reform mandatory programs to put the budget on a path to balance before increasing the debt limit.
Source material can be found at this site.