One of the continuing tropes we see around every debt limit extension is: 1) if we don’t extend the debt we force the government into default, and 2) the U.S. has never defaulted on its debt, and finally 3) that would force the U.S. to pay much higher interest rates in the future. So let me encourage you in the face of this negative news: none of it is true, as careful reflection will reveal.

The first myth is the easiest to expel if we simply think about this not in Washington terms, but the way the rest of the world operates. Let’s say that you make a combined family income of $100k/yr, and you have regularly been spending at levels of $150k/yr by taking out home equity loans on the appreciated value of your home. In that spending, you have loan payments of $40k/yr on your home, and $10k/year on your two new cars. But last year you were able to take the whole family on three vacations outside the Conus (imagine this was a non-covid world) for $40k, and you did a master bedroom remodel for $25k (and are planning to do a similar basement finishing for $50k this year). The remaining $35k you spent on relatively essential spending such as food, college loan repayment, and of course Netflix and the expensive game day package. Oh, and dining out once/week, with take in twice a week, and lunch out every day, since who has time to cook? Unfortunately for you, the Federal Reserve decided it was finally tired of inflation and started raising interest rates, which caused housing prices to deflate. And you can no longer borrow $50k again this year against the value of your house. Now this might be a desperate situation for you, but surely you would not think that just because you won’t be able to borrow $50k against the value of your house, that you must default on your home mortgage (let’s assume that the value is still greater than what you owe so no strategic default). While it’s sad, any responsible person would approach that with “what is the most non-essential spending we could cut?” After all, you still have $100k in family income. The question now becomes simply, how much can we buy with only $100k instead of $150k? The fact that you had budgeted for spending on vacations in no way means that you are obligated to go on vacation in the same way you are obligated to pay your mortgage. The U.S. government is similar. Last year the US Treasury took in $3.42T in tax revenue, even while the national debt interest payments were only ~$525B. If the U.S. government were not to extend the debt limit there would be more than ample revenue to pay our debts many times over. It is true, of course, that we could not do that AND do all the spending that we planned to do, no different than you or I could do 3 vacations and a basement remodel. Something we would like to do must fall off the table. But why in Washington is it always said that we would stiff our creditors? If we do default, that is a strategic choice of our politicians.

The second canard (that we’ve never defaulted on our debt) is simply gross and/or willful ignorance. The U.S. Federal Government defaulted twice in the last century from the gold standard, in 1933 and again in 1971. To have agreements to pay foreign governments 1oz of gold for every $35, and then close the gold window is a default by any reasonable definition. Secretary of the Treasury John Connally famously said to other nations at the time, “it’s our currency, but it’s your problem.”

Finally is the issue that default would drive up interest rates. If the Federal Reserve were to stop monetizing our debt this would be true. But the humongous deficits we are running would already do this even if we were legally allowed to borrow more were the Fed not artificially keeping interest rates low via financial repression. There is no reason to suspect that if the U.S. were to default (despite having ample revenue to pay its debts) we would suddenly see the the Federal Reserve get monetary rectitude. As long as the Fed keeps buying $80B in Treasuries every month, I don’t think we’ll see interest rates spike up. This is only the every so often Kabuki Dance we choose to do over the national debt.