Breitbart Business Digest: U.S. Will Not Need to Default on Debt No Matter What Happens with the Debt Ceiling

The Debt Ceiling Does Not Really Threaten Default

The U.S. is extremely unlikely to default on its debt, no matter how badly the negotiations over the debt ceiling break down.

The Congressional Budget Office said last week that the Treasury Department’s ability to keep making payments on its bills could be exhausted sometime between July and September if Congress does not raise or suspend the limit on U.S. borrowing. This gets confusing described as risking the U.S. “defaulting on its obligations,” which many people interpret to mean the U.S. might default on debt issued by the U.S. Treasury. That’s not what it means.

To get the obvious point out of the way, there is a heightened risk of a tense standoff over the debt limit now that Republicans control the House and Democrats control the Senate and the White House. Republicans will seek to exact some concessions from Democrats, likely in the form of spending cuts to discretionary programs or limits to future spending growth, in exchange for supporting a debt ceiling. Indeed, the Republican leadership in the House reportedly agreed to fight for spending reforms in exchange for a debt ceiling hike as part of the effort to secure support for Rep. Kevin McCarthy’s speakership. “There will be no clean debt ceiling increase, that’s for sure,” Rep. Scott Perry (R-PA), chairman of the House Freedom Caucus, said back in January.

There have, however, been signs that this might not come down to the wire, as it did in the debt ceiling standoff in 2011. Speaker McCarthy and President Joe Biden have agreed to negotiate over the debt ceiling. That is an apparent sign that Biden has, at least as an initial matter, rejected calls from the left of his party to refuse to negotiate at all and demand nothing short of a clean debt ceiling increase.

Biden’s Weakness Heightens the Chance of a Stalemate

Biden is a deeply unpopular president whose administration has been bogged down by the burdens of high inflation. He’s frequently posed as a deficit reducer and his most recent legislative accomplishment was the Inflation Reduction Act (IRA), which was sold to the public as reducing the deficit. Even if we think the pose and the IRA’s promise are phony, it sends a signal about the Biden administration’s view about which way the political winds are blowing. Biden seems likely to decide that this is not the right opportunity to be a crusader for high government debt.

The weakness of the Biden administration, however, could cut the other way. On the one hand, it could embolden Republicans to seek deeper concessions than the White House is willing to make. On the other, the furthest left of the Democrats in the House and the Senate could refuse to support a deal that they view as giving away too much to the GOP.

2011 All Over Again?

Both sides may believe they could benefit from brinksmanship or even from the U.S. passing over the final debt limit threshold so that spending is constrained. On the right, a debt ceiling crisis could be seen as an embarrassment for the Biden White House. And on the left, there is the widespread impression that any economic or financial disorder caused by the debt limit would be blamed on Republicans, just as the near-miss and downgrade of the U.S. credit rating in 2011 was. The media allies of the Democrats are sure to encourage this belief.

The Constitution Requires Us to Prioritize Debt Payments

Even if the government reaches the point where no new debt can be issued, Treasury will have many options short of defaulting on its actual debt. Indeed, there’s a good argument that the Treasury will be obligated to pursue those options should they become necessary because Section 4 of the 14th Amendment makes the obligation to make debt payments inviolate. In an opinion piece in the Wall Street Journal on Tuesday, David Rivkin and Lee Casey persuasively argue that the U.S. cannot constitutionally default on its debts. Any statutory limit that appears to bar payments would be set aside as a violation of the constitutional obligation to pay debts.

Far more likely, the U.S. government would be forced to prioritize debt payments over payments of other obligations. Treasury has long maintained that it does not believe it should prioritize debt, arguing that any failure to pay any obligation on time is a “default.” But the constitution does differentiate between debts and other types of obligations and arguably requires prioritization should it be necessary.

Financial markets are also likely to appreciate the difference between, say, suspending Congressional paychecks or holding back payments to international organizations and not making timely interest payments on Treasury bonds. Since the U.S. Treasury takes in more than $450 billion a month in revenue and needs only $55 billion to cover debt service, there will always be money to pay the bondholders.

There has been some question of whether or not it is technically possible for the U.S. government to pay some bills but not others. That’s nonsensical. Even if the government were not prepared to prioritize payments in 2011, it stretches credibility to believe that the Federal Reserve and the Treasury have not put in place back-up systems to do so in the dozen years since. In fact, back in 2011, it appears the Fed already was discussing plans to prioritize payments based on three principles.

“The first one is that principal and interest on Treasury securities would continue to be made on time. The second one is that other payments may be delayed. The third principle is that any payments that were made would be settled as usual,” a Fed staffer told the Federal Open Market Committee, according to a meeting transcript from August 2011. The transcript then goes into quite a bit of detail about how those principles could be implemented.

The Check Is in the Mail… But with Some Delays

So what could the government delay? Putting a hold on Social Security payments would cause immediate financial distress to many U.S. households and invoke political wrath that the Biden administration would no doubt prefer to avoid. The same with paychecks to members of our armed forces. It would be politically easier for the government to delay payments of things like Medicare reimbursements to hospitals and other payments to government contractors, including defense contractors. So this is where we would expect the payments freeze to be felt.

The attempt to describe a delay in these payments as a “default” is politics, not economics or finance. The bond market is likely to see through this smokescreen.