In violent times
You shouldn't have to sell your sould
In black and white
They really, really ought to know
--Tears for Fears
Over the past 24 hrs, I have heard more than one stalwart media outlet claim that a budget agreement by the Aug 2 deadline is necessary to avert a default. That this drivel continues to be spooned out reflects the sad state of reporting in this country.
Statements that equate no budget agreement with default are simply not true. These 'untruths' reflect either a lack of precision with language, poor financial literacy, or deliberate attempts to deceive.
One more time, lets looks at the data. Expected receipts are $2.2 trillion in 2011 and $2.6 trillion in 2012. Expected net interest outlays are $207 billion in 2011 and $242 billion in 2012. As such, outlays for interest payments are expected to be less than 10% of inflows.
Clearly, the federal government has the capacity to pay its debts. One does not need a 'professional' to figure this out.
The current debt ceiling discussion is more accurate framed like this: It is a discussion as to whether the federal government has the fortitude to cut spending now.
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Many people are wondering about the possibility of a default by the Treasury on August 3, 2011, when, according to the Treasury's projections, it will no longer be able to meet all expenses without additional borrowing.
In this event, it is unlikely a default will occur. Historically, governments prioritize debt service above all other expenses. If the expansion of funds via debt becomes impossible, the Treasury will cease paying other expenses first, starting with "nonessential" discretionary expenditures, and then move on to mandatory expenditures and entitlements as a last resort.
In extremis, what will happen is that all the losses will be foisted onto the Federal Reserve. The Fed holds something on the order of $1.6 trillion in debt issued by the Treasury of the United States. By having the Federal Reserve purchase blocks of Treasury debt and defaulting on these non-investor-held securities, the United States can postpone a default against real investors essentially forever.
~John Chamberlain
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