The Corner

Don’t Be Fooled

Over at Frum Report, Noah Kristula-Green writes that I am disingenuous because if the U.S. defaults on its debt, it will be very painful.  First, I am not quite sure where I have claimed that defaulting wouldn’t be painful. In fact, I have always said that the U.S. shouldn’t default on its debt. I have also said that 1. the U.S. does not have to default; 2. there is a world between reaching the debt ceiling and defaulting on our debt; and 3. raising the debt ceiling without changing the path this country is on would be irresponsible.

Let’s start. Kristula-Green mentions my paper with Jason Fichtner listing assets and revenue that Treasury can use to avoid a default. The list is very conservative. It is also far from being exhaustive. For instance, it only lists financial assets rather all of the things that Treasury could sell (such as lands and building). More important, he is missing the point that we are making in that paper. We do not argue that it would be easy or painless to sell assets. But it is also incorrect to argue, as he does, that all of the assets on that list are off limits. Treasury’s liquidity isn’t  restricted to $2.2 trillion in revenue. In fact, Secretary Geithner has started to take measures, some of them listed in our paper, to keep the government running past May 16.

Sadly, he misses a more crucial point of our piece, which is that forcing the Treasury to sell assets in order to pay the government’s bill may be undesirable, and brought about by a series of repeated and unbelievably irresponsible decisions by our leaders for years — yet it would be just as irresponsible to continue to pass debt-limit increases without putting in place a credible plan to reduce future government spending and put the nation back on fiscal track so that Treasury can eventually pay off the nation’s debt.

We realize that, at some point, the debt limit will likely be increased. That’s not the question. The question is: When does it have to be, and under which circumstances? Given that the U.S. Treasury collects over $2.2 trillion a year in tax receipts, that is more than enough to cover the interest payments on our debt (approximately $200 billion) so that the U.S. doesn’t default — and pay for all Social Security, Medicare, and Medicaid payments, and leave $400 billion for other expenses. Along with that $400 billion, the Treasury could sell assets to effectively manage cash flow to continue paying all of the government’s bills at least through the end of the fiscal year and probably longer.

Under no circumstances should Congress raise the debt ceiling under false pretenses or misinformation. The biggest threat to our long-term fiscal security is not whether we pass the debt-limit increase today, tomorrow, in August, or never — but whether we put a credible plan in place to reduce lawmakers’ addiction to borrowed funds to pay for daily expenses. More importantly, can we do it before entitlements and interest payments consume a larger and larger share of our resources?

On that note, it is worth reading the Wall Street Journal interview this weekend with Stanley Drukenmiller, the famous investor (and onetime fund manager for George Soros) about the debt ceiling:

The grave danger he sees is that politicians might give the government authority to borrow beyond the current limit of $14.3 trillion without any conditions to control spending. 

One of the world’s most successful money managers, the lanky, sandy-haired Mr. Druckenmiller is so concerned about the government’s ability to pay for its future obligations that he’s willing to accept a temporary delay in the interest payments he’s owed on his U.S. Treasury bonds—if the result is a Washington deal to restrain runaway entitlement costs.

“I think technical default would be horrible,” he says from the 24th floor of his midtown Manhattan office, “but I don’t think it’s going to be the end of the world. It’s not going to be catastrophic. What’s going to be catastrophic is if we don’t solve the real problem,” meaning Washington’s spending addiction.

We should fear a default. But it’s not the default that Secretary Geithner has been warning the country about. It is the one that happens some time down the road if Congress never cleans its financial house.


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