Here in a Q&A format are basic issues about default and what it means:
Q: What is a default?
A: A default would be the failure by the U.S. Treasury to make payments of principal or interest on its debt in a timely manner.
Q: In a given month how much does the Treasury owe as interest on its debt?
A: Roughly about $30 billion.
Q: How much revenue does the Treasury take in on average in a month?
A: Roughly about $200 billion.
Q: Are you saying the Treasury could pay interest on its debt several times over from monthly income?
A: Yes. Therefore the likelihood of not paying interest on its debt is zero.
Q: What happens if the debt ceiling is not raised?
A: We do not know, but in all likelihood, the world will not end nor will the government cease functioning.
Q: What about credit rating agencies threat to downgrade U.S. debt?
A: The rating agencies do not have a lot of credibility with me so I’m not terribly concerned about them. Nonetheless, we need to be clear on what they are actually saying. The major rating agencies have stated that the primary threat to our AAA rating is the buildup of high amounts of debt tied to huge annual budget deficits. The uncertainty over the debt ceiling is certainly an issue, but that is not the main one behind a potential downgrade.
Q: If the debt ceiling is not passed, what happens?
A: I believe the Treasury will begin prioritizing interest payments on U.S. Treasury debt. It will also prioritize other critical payments such as Social Security, Medicare and so on. There are other strategies that could be used such as buying back with digital dollars the $1.6 trillion in Treasury debt owned by the Federal Reserve. Once re-purchased that debt could be retired and more could be issued thus alleviating the immediate problem. Something similar could probably be done with government debt owned by the Social Security Administration in its trust funds.
Q: But, what about redeeming bonds that come due?
A: As bonds come due, the Treasury would again use monthly income to pay them off. This would lower the debt owed beneath the so-called debt ceiling. Then, the Treasury could turn around and issue debt in that amount up to the debt ceiling.
Debt is a symptom; overspending is the disease
Though the debt ceiling is getting all the attention, the real issue is the rapid growth of government debt. I believe the increase in the debt ceiling should be passed, but I also believe we have to address the more important issue, growth in government indebtedness. The Federal government is borrowing roughly 44% of what it spends. That is why we keep running into the debt ceiling. The debt ceiling is really just a technicality. The long-term issue is the size and scope of government and growing debt is just a symptom of that.
Take a look at how much Federal spending has increased in just the past few years. If you think there is any form of math in which this kind of increase is sustainable, think again.
Federal Budget Year Amount Spent
2008 $2.98 trillion
2009 $3.51 trillion
2010 $3.46 trillion
2011 (est.) $3.81 trillion
By way of example, in President Clinton’s last full year, fiscal year 2000 which ended Sept. 30, 2000, Federal revenues and spending were as follows:
- Revenues: $1.88 trillion
- Spending: $1.77 trillion
Back then, revenues of $1.77 trillion resulted in a budget surplus. We now take in considerably more, about $2.2 trillion per year, but we have a huge deficit of approximately $1.6 trillion. Had we held the line on spending, we would still have a surplus or a modest deficit. To see the data for the Clinton administration years, click here:
The silver lining
The silver lining of this debate and debacle over the debt ceiling is that we are actually discussing the root cause of problem, which is deficit spending and growing debt levels. We are also going to be faced with making hard choices on spending priorities because we cannot do everything one interest group or another might like us to do. And, since Congress refuses to do the right thing in order to bring spending in line with revenues, we will have to keep the pressure on.
Anna Kournikova
Hayden Panettiere
Cameron Diaz
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