The US won’t default by default


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.

2 Responses to "The US won’t default by default"
  1. So amounts owed to social security recipients under current policy are not also debts / liabilities? How do you figure that foreign owners of US debts are the most senior holders of debt? Higher than military wages, politicians’ wages etc?

    If you really like to use your household analogy, then what you are saying is that the US is likely to stop feeding the kids and putting petrol in the car in order to avoid bankruptcy. Maybe. Or maybe the pain of this approach is worse than bankruptcy. Ultimately this is a political game that has played out before, and probably will again.

    I get the feeling that you need to know an awful lot about the inner workings of Congress, Treasury and the Fed to make any claims about likely the course of events and any political or institutional constraints. This post doesn’t appear to meet these criteria and seems far too ideological and overly simplistic.

  2. Rumple
    The post only has one simple point — that there is no definitive date on which the US will default on its sovereign debt. The US Treasury can go on indefinitely without defaulting on its debt despite a failure to increase the debt ceiling. And, that is why the markets are unperturbed so far. Delaying payments on social security payments by a few days is a better outcome for everyone than a sovereign default by the US, which would be catastrophic. If you are interested in a really detailed discussion of how the Treasury can manage the payments to prevent default, then please see the Bipartisan Policy Centre presentation linked to in the post.

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