Monday, July 18, 2011

If Debt Ceiling Talks Fail, Treasury Has Options

Been following the news? Heard about the economic catastrophe that's about to befall if the Republican don't acquiesce to President Obama's reasonable requests for increased revenue?

Of course you have. After all, the mainstream press is nothing if not willing and eager to share the White House talking points.

But maybe there's a little more to it all...

Peter Morici, Senior Contributor to TheStreet
It is unfortunate the president and Treasury secretary are spreading around calamity scenarios, because the Treasury really does have options after Aug. 2 if it doesn't scare the markets into panic before then.

The Treasury will still be receiving 55% of its tax revenue and can easily pay the interest on the debt, and should then be able to roll over bonds coming due. For the balance of federal expenses, the Treasury will have to prioritize, but it will have enough money for Social Security, Medicare and Medicare. Some checks may have to be spread out to accommodate discrepancies between payment dates and cash flows, but interest payments are modest enough, relative to the total cash coming in, that those can be met on time.

Selective payment of federal bills is possible -- it was planned for government shutdowns when Congress and the president failed to approve appropriations -- and it can be accomplished again if planned prior to Aug. 2.
So apparently, we don't just run out of money and automatically default on August 2nd. And maybe, just maybe, the President's Social Security threats are just political broadsides aimed at scaring people into opposing the Republicans. And just possibly the media understands that, but agrees with the President so doesn't make any attempt to clarify.

And here's something else to keep in mind.
A downgrade is likely no matter what comes out of current negotiations. Specifically, Standard and Poor's has indicated a $4 trillion deficit reduction package is necessary by Aug. 2 to avoid a downgrade. That simply is not possible given the president's aversion to genuine spending cuts -- evidenced by his failure to table concrete spending cut proposals -- and the insistence on no new taxes by many members of the Republican House caucus.
So what actually happens on August 2? One of two things:
a) Default

b) Partial government shutdown
If the United States defaults in August 2011 on one penny of debt service or misses one Social Security check, it's the responsibility of one man - Barack Obama. A default would have occurred because the President of the United States chose the political course of prioritizing all current spending over the obligations of debt service and Social Security.

In essence, if we default in August, it's because the President chose to continue the cable service instead of paying the mortgage...

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