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Raising the National Debt Ceiling.  What Does this Mean for the Future? Thumbnail

Raising the National Debt Ceiling. What Does this Mean for the Future?

“The United States can pay any debt it has because we can always print money to do that.  So there is zero probability of default.”

-Alan Greenspan

This past week we heard a steady stream of politicians and pundits in Washington drag out the “default” bogie in the discussions about raising the nation’s debt ceiling.  There was much posturing on both sides of the aisle as members of both parties and their minions sought to gain the most political points from the situation.  Headlines in many papers and many broadcast stories talked about the threat of default, and after the compromise reached last week just as many stories talked about how default was “averted”. “We’ll leave the political scoring to the chattering classes, but what of the threat of default?

Technically, Congress sets a limit on the amount of outstanding debt of the U.S. Government.  Currently, that amount is $29.4 trillion (through December 3, as per the compromise).  What would have happened had the ceiling not been raised?  The one thing you can be sure of is that the U.S. Government would NOT have defaulted on any of its obligations, meaning that holders of U.S. Treasury Bonds were not paid interest or principal due.  

First of all, debt payments are only part of Federal expenditures, currently running about 10% of the budget (high enough for sure, but that’s a topic for another day).  If forced, the government could divert money from other uses to meet debt service payments (maybe not a bad thing, as it might force some bloated bureaucracies to tighten their belts, another topic for another day).  Then, as Greenspan says, even if the Government couldn’t directly borrow more, it could always just print the money, literally.

Consider another alternative.  In the absence of an increase in the debt ceiling, suppose the Treasury did issue some new bonds that pushed total borrowing above the cap.  The political din would be deafening, of course, but what of consequence would really happen?  The FBI arrests the Secretary of the Treasury?  In reality, it would just demonstrate that the debt ceiling debates are pure political theater.  It’s instructive to remember ten years ago when Standard & Poor’s announced that the U.S. was being given a negative outlook on its credit rating.  For months stories about the dire consequences of a downgrade of U.S. debt appeared.  Then, on August 4, 2011, S&P cut our rating from AAA to AA+.  What happened?  The U.S. stock market fell almost 9% in three days, and … Treasury Bonds soared!  Go figure.  The stock market quickly stabilized and was back above the pre-downgrade level before Halloween.  And then everyone forgot about the whole affair as the very idea of a credit rating on U.S. debt is preposterous given the dollar’s role as the world’s reserve currency.

In November and December, as the new deadline looms, the Chicken Littles will be out in full force again.  Ignore them and just enjoy your holidays!

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