I wrote here that no matter what happens with the debt limit, the federal government will not default on its debt obligations. I also noted here that Moody’s–which certainly ought to know–agrees that there is zero chance of default on Treasury bonds. In recent days, many more commentators have made the same point. The government is legally obligated to recognize its debt obligations, and the existing $17 trillion debt can be serviced on less than ten percent of federal revenue. So there simply can’t be a default.
But the Associated Press continues to carry water for the Democrats, conjuring up a catastrophe where none exists: “AS US DEFAULT NEARS, INVESTORS SHRUG OFF THREAT.” The AP never considers the possibility that investors are shrugging it off because they are smart enough to know it can’t happen.
Warren Buffett likens it to a nuclear attack. Economists warn that government spending on programs like Social Security would plunge. The Treasury says the economy would slide into a recession worse than the last.
Yet you wouldn’t know that a U.S. debt default could amount to a nightmare from the way many companies and investors are preparing for it: They aren’t.
Note how, from the beginning, the AP mixes up issues. Would a default on U.S. Treasury bonds be a disaster? Of course. No one denies that. But what does that have to do with spending on programs like Social Security? Social Security is not a debt obligation; and, in any event, it is discretionary spending that would be cut if the debt ceiling were reached, not entitlements.
Brian Doe, a wealth adviser at Gratus Capital Management in Atlanta, has 35 clients who’ve entrusted him with $50 million for safekeeping. He isn’t losing sleep over a potential default. Neither are his clients, apparently. Not one has called him about the issue, he said.
Might this not be a clue?
That worse case is inching closer. The Treasury says it will run out of money to pay its bills if Congress doesn’t increase its borrowing authority by Thursday. That includes paying interest and principal on already issued U.S. Treasurys, considered the most secure financial bet in the world.
The Treasury says that without the ability to borrow more than the $17 trillion we already owe, the federal government won’t be able to “pay its bills.” What they mean by that is that spending will be cut: henceforward, it will have to equal revenue, just as though a balanced budget amendment had been enacted. When Democrats talk about “paying our bills,” they mean maintaining spending at ever-growing levels. But the AP wasn’t satisfied with that; they gratuitously added that claim that “that includes paying interest and principal on already issued U.S. Treasurys.” It doesn’t. The federal government can service its existing debt–i.e., pay the interest–on less than 10% of revenues. And it can renew the principal amount of that debt, $17 trillion, forever, simply by rolling it over. When the government issues new bonds to pay the principal on old ones that mature, there is no net increase in federal debt. So the AP’s claim that bond principal payments are somehow endangered–i.e., that default could occur–is sheer ignorance.