Wednesday, July 13, 2011


Have you heard that “if nothing is done,” the US government will default on its debt in early August? This unprecedented disaster is now presented in news stories as a sort of algebraic equation: DO NOTHING plus AUGUST 2 equals DEFAULT. Only a couple weeks ago, we were being warned about the “possibility” of a default or a “potential” insolvency. Now it's a given. It's the end of the world as we know it. There's the cliff, right up ahead, and we're going over.

Now, I will admit I am not a professor of finance or a professional economist, so here's my question: what the hell are they talking about? How, exactly, will the US government be rendered incapable of paying its debts as they come due? I have searched diligently for an explanation of how this will happen, but neither CNBC nor the New York Times nor the blogging world have anything to offer.

Currently, the debt service for US obligations amounts to about $20 billion each month, give or take. Revenues, primarily tax receipts, are about $200 billion per month, give or take. These are the basic numbers the federal government is working with and they don't vary much from month to month. How, then, can a default occur? When you are taking in ten times the amount you MUST pay out, doesn't the interest on all those trillions of T-bills come first?

Suppose you are bringing home $10,000 a month and your mortgage payment is $1000. Doesn't the mortgage get paid? There may be a lot of things you would rather spend the money on, but would you buy them all and let your house payment go south? According to the news media and virtually all our elected officials, both Republican and Democrat, the only option in this situation is to borrow more money to pay for the new Lexus and the country club dues and the private school tuition and the blond you have tucked away in an apartment downtown. You must pay for those things first, so that if you can't borrow more money somehow, you will have to short Wells Fargo. They're apparently all agreed on this point. Raise the debt limit or we go underwater. Default looms!

With its $200 billion every month, the federal government can pay the debt, the geezers, and the soldiers. At that point, there will be about $75 billion left for everybody else (the Department of Energy, the TSA, welfare programs, the SEC, etc., etc., etc.) to fight over, and none of them will like it.

I'm not suggesting it's a good idea to cut hundreds of government agencies in half (well, OK, maybe I am), but the point is that the default bogeyman is pure hooey. There is no reason to think the US government will default on its debt obligations, whether or not the debt ceiling is raised. It's just a lie, as is Obama's warning yesterday that geezers won't get their Social Security payments in August.