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Will the U.S. Default on its Debt? Say it isn’t so!

15 Oct 2015

As we approach 5 November, the date that Treasury Secretary Lew has said the U.S. will run out of money, there are more articles coming out on the possibility of the U.S. defaulting.  Implicit in almost all the reporting is the false assumption that if partisan politics prevents an extension of the debt, the U.S. must default.  By framing it this way (either extend the debt ceiling or default), the advantage goes toward those seeking to expand the national debt.

This narrative has no basis in economic reality, although it could be a political reality.  The U.S. takes in more than enough tax revenue to service its debt; Secretary Lew does not need an increase in the debt ceiling to service debt payments.  What he does need an extension for, of course, is to not only service the debt but also continue with the planned rate of annual spending.  He cannot continue to pay for all these things after 5 Nov.

Consider this:  you planned on taking out a car loan and going further into debt.  You also generally like to eat and go to the movies, and you also have a home mortgage.  Let’s say the bank refuses to give you the car loan.  Does the bank’s action force you to buy the car with your current income and default on your mortgage payment?  Most of us would say no; this would simply cause us to think more closely about our priorities.

It is of course true that all of the planned spending has been promised to someone, such that not providing that spending is a broken promise.  But is a promise to pay the rich Fanjul family a sugar subsidy from the taxpayer the same kind of promise as not paying back a loan?  I don’t think so.

Second, we regularly hear that the U.S. has never defaulted on its debt.  Of course we have, at least twice in the 20th century (1933/1971 vis a vis the gold standard).  So when you the politicians talking about how fiscally prudent they insist on being by taking us further into debt lest we violate something we never have, understand this is not true.  What is true is that extending the debt extends their ability to continue spending at a rate greater than they are willing to tax us.

Why is all this discussion important?  Well, maybe this isn’t the time and place to tackle the exploding debt.  But the reality is that when Mr. Obama took office, the national debt was ~60% of GDP, and now we are over 100% of GDP.  As the saying goes, “if not now, when?  If not us, who?”  For the politicians, the appropriate time to deal with this is never.

nat'l debt