The U.S. Treasury will not default even if the debt ceiling extension does not pass

The U.S. Treasury will not default even if the debt ceiling extension does not pass


By Kurt Brouwer

I have written before expressing my view that the Treasury will not default even if the debt ceiling extension does not pass.  Before I go further, it is important to note that this term — default — has been used loosely by many in government and the media.  It is often used to refer to failure to make any payment whatsoever that some agency of government has agreed to pay.  I think that is incorrect.  I’m not in favor of not making payments on subsidies to rich farmers (cough, cough…maybe I am on this one) or on other really important stuff like Congressional salaries (on second thought…), but I digress.  Failure to pay bills that keep government going would be bad, but it would not constitute default.


What is default?

Default is what happens when an entity fails to make a payment due on its debt.  That is, a default would occur only if the Treasury fails to make interest payments or principal payments on the debt the U.S. Treasury has issued.


Despite all the rhetoric and posturing we see in the media and in Washington D.C., it is safe to say categorically that the U.S. Treasury will not default on its debt after August 2nd, even if the debt ceiling is not raised.  Not only will the Treasury be able to pay interest on U.S. debt obligations, but there is money for a number of other essential programs as well.  However, there will be some serious cutting that has to happen because spending clearly exceeds revenues.


The debt ceiling increase should go through

I am in favor of an increase in the debt ceiling and I believe there is a high probability that a debt ceiling limit extension will be enacted, but that really is not the issue.  If it does not pass, the Treasury would have to take other measures including prioritizing expenditures such as principal and interest on the debt, Social Security payments and so on.In my view, failing to make expenditures promised by government agencies would be bad.


However, as this chart shows, the debt ceiling really is a bit of  a joke.  It’s not a ceiling in any normal sense of the word, just a technicality.  Both Republicans and Democrats have become addicted to debt and it was just assumed the debt ceiling would get passed automatically:



As you can see, we have had umpteen increases in the ceiling and so it has not inhibited the growth of government indebtedness.  However, failure to pass a debt ceiling increase by August 2nd will not result in a default on U.S. Treasury debt.


Here in a Q&A format are basic issues about default and what it means:


Q: What is a default?

A: A default would be the failure by the U.S. Treasury to make payments of principal or interest on its debt in a timely manner.


Q: In a given month how much does the Treasury owe as interest on its debt?

A: Roughly about $30 billion.


Q: How much revenue does the Treasury take in on average in a month?

A: Roughly about $200 billion.


Q: Are you saying the Treasury could pay interest on its debt several times over from monthly income?

A: Yes.  Therefore the likelihood of not paying interest on its debt is zero.


Q: What happens if the debt ceiling is not raised?

A: We do not know, but in all likelihood, the world will not end nor will the government cease functioning.


Q: What about credit rating agencies threat to downgrade U.S. debt?

A: The rating agencies do not have a lot of credibility with me so I’m not terribly concerned about them.  Nonetheless, we need to be clear on what they are actually saying.  The major rating agencies have stated that the primary threat to our AAA rating is the buildup of high amounts of debt tied to huge annual budget deficits.  The uncertainty over the debt ceiling is certainly an issue, but that is not the main one behind a potential downgrade.


Q: If the debt ceiling is not passed, what happens?

A: I believe the Treasury will begin prioritizing interest payments on U.S. Treasury debt.  It will also prioritize other critical payments such as Social Security, Medicare and so on.  There are other strategies that could be used such as buying back with digital dollars the $1.6 trillion in Treasury debt owned by the Federal Reserve. Once re-purchased that debt could be retired and more could be issued thus alleviating the immediate problem. Something similar could probably be done with government debt owned by the Social Security Administration in its trust funds.


Q: But, what about redeeming bonds that come due?

A: As bonds come due, the Treasury would again use monthly income to pay them off. This would lower the debt owed beneath the so-called debt ceiling.  Then, the Treasury could turn around and issue debt in that amount up to the debt ceiling.


Debt is a symptom; overspending is the disease

Though the debt ceiling is getting all the attention, the real issue is the rapid growth of government debt.  I believe the increase in the debt ceiling should be passed, but I also believe we have to address the more important issue, growth in government indebtedness.  The Federal government is borrowing roughly 44% of what it spends.  That is why we keep running into the debt ceiling.  The debt ceiling is really just a technicality.  The long-term issue is the size and scope of government and growing debt is just a symptom of that.


Take a look at how much Federal spending has increased in just the past few years.  If you think there is any form of math in which this kind of increase is sustainable, think again.


Federal Budget Year                   Amount Spent

2008                                             $2.98 trillion

2009                                             $3.51 trillion

2010                                             $3.46 trillion

2011 (est.)                                   $3.81 trillion

By way of example, in President Clinton’s last full year, fiscal year 2000 which ended Sept. 30, 2000, Federal revenues and spending were as follows:

  • Revenues: $1.88 trillion
  • Spending: $1.77 trillion

Back then, revenues of $1.77 trillion resulted in a budget surplus.  We now take in considerably more, about $2.2 trillion per year, but we have a huge deficit of approximately $1.6 trillion.  Had we held the line on spending, we would still have a surplus or a modest deficit.  To see the data for the Clinton administration years, click here:


The silver lining

The silver lining of this debate and debacle over the debt ceiling is that we are actually discussing the root cause of problem, which is deficit spending and growing debt levels.  We are also going to be faced with making hard choices on spending priorities because we cannot do everything one interest group or another might like us to do.  And, since Congress refuses to do the right thing in order to bring spending in line with revenues, we will have to keep the pressure on.



Views: 70


You need to be a member of 12160 Social Network to add comments!

Join 12160 Social Network

"Destroying the New World Order"


mobile page

12160 Administrators



Latest Activity

Bob Renner favorited luggnutz's video
55 seconds ago
Bob Renner posted photos
16 minutes ago
Doc Vega posted blog posts
3 hours ago
cheeki kea commented on luggnutz's video

Trudeau Liberals Caused Canadian Pandemic

"He's one prick of a prat he is. If you're from Canada you know what to expect from him…"
5 hours ago
luggnutz posted a status
"Got it out. Have your baby now...sad fallen things."
5 hours ago
luggnutz posted videos
5 hours ago
luggnutz posted photos
7 hours ago
luggnutz commented on luggnutz's status
"I'm trying to post a blog. Constantly getting blocked."
7 hours ago
luggnutz posted a status
"Mods, any reason why blogs are not uploading? It's not letting me post."
7 hours ago
luggnutz favorited luggnutz's video
7 hours ago
Dr. Frederick Meekins and Less Prone are now friends
8 hours ago
Dr. Frederick Meekins posted blog posts
8 hours ago
luggnutz posted a status
"Trudeau death!"
8 hours ago
luggnutz posted a status
"A young female 'ginger' walks by making cicada sounds in to her iphone. No abla. Locust Biden got me 'in check'. Pitiful yet hilarious."
8 hours ago
9 hours ago
Tim Brown posted blog posts
14 hours ago
Tim Brown favorited Chris of the family Masters's blog post How globalists convinced BILLIONS of people to exterminate themselves
16 hours ago
luggnutz posted a status
"They 'read' everything but can't read what time it is. 'Reading' is more than just words in a book. What you're doing, do more quickly!"
19 hours ago
luggnutz posted a status
"Got you gnats across the street up late too I see. Pitiful. Bet the maggots under the skin writhing is not too comfortable either.Come."
19 hours ago
luggnutz posted a status
"So Jar Head/Ronald McTrumpet/Locust Biden are blocking and hacking the i.p. and I'm still getting through. Get thee behind me satan!"
19 hours ago

© 2021   Created by truth.   Powered by

Badges  |  Report an Issue  |  Terms of Service

content and site copyright 2007-2019 - all rights reserved. unless otherwise noted