By Robert Romano
“I say, imagine in your private life, if you decided that I’m not going to pay my mortgage for a month or two — first of all you’re not saving money by not paying your mortgage. You’re just a deadbeat.”
That was Barack Obama describing the plight of delinquent mortgage borrowers, comparing them to members of Congress who dare to question whether the nation can continue to afford to borrow around $1 trillion a year via the ever-increasing debt ceiling.
But what about Obama? If the $16.669 trillion debt ceiling is not raised by Congress, would he default on the nation’s debt?
Is he the deadbeat president?
That’s the question everyone should really be asking as the nation fast approaches the Oct. 17 supposed deadline for Congress to increase debt limit. After that, according to Treasury officials, the nation will default on its obligations to creditors.
But is a default really necessary? Wouldn’t the Treasury just prioritize interest payments to creditors out of the more-than-ample revenue we take in and refinance existing debt up to the statutory limit?
More than enough tax revenue to pay interest owed on the debt
After all, gross interest on the debt owed to our creditors and the Social Security and Medicare trust funds will only total $417.9 billion in 2014, while revenue is projected to total $3 trillion, according to the Office of Management and Budget.
That averages to about $34.8 billion owed in interest every single month. Taking a peak at Treasury’s monthly statement, the lowest revenue ever gets is usually in February, when it was most recently $122.8 billion. It peaked in April at $406.7 billion. Either way, there is always more than enough taxes collected each month to pay interest on the debt. There just wouldn’t be enough revenue for everything else.
Granted, revenue collected versus interest owed on a daily basis would vary dramatically — and certainly there might even be days where interest owed exceeded revenue on hand. But, the Treasury also knows what is coming due and when it is coming due.
Therefore, creating an escrow-like account in advance of reaching the debt ceiling to deposit surplus revenues for the purposes of paying interest owed when revenues take a dip would more than guarantee payments would be made on time and in full. Whether Treasury Secretary Jack Lew has done that or not since the debt limit was initially reached in May is another question entirely.
The primary point here is that even if the debt ceiling is reached, a default is first and foremost unnecessary. There’s more than enough tax revenue to pay interest on the debt, and existing debt could be refinanced.
Others believe that should Congress fail to increase the debt ceiling, Barack Obama will falsely invoke the 14th Amendment to the Constitution as somehow authorizing a unilateral, arbitrary increase in the borrowing limit.
This piece shall take the contrary view that the Obama administration will not pursue either of these two options. That Obama would actually default — and may even have reason to believe it would be politically advantageous for him to do so.
But wouldn’t a default be… bad?
First, before making that case, on the surface it would appear to be common sense that Obama wouldn’t be foolish even if the debt ceiling were to be hit. That he would either prioritize payments or go the 14th Amendment route to hike the debt limit. After all, a default on U.S. debt would in fact be catastrophic to not only our economy, but the world’s economy.
It would be unthinkable.
The principal reason for that is because the U.S. is the caretaker of the world’s reserve currency, the dollar. In addition, some $5.6 trillion of federal government debt is held overseas. Plus, under Basel III capital requirements, sovereign debt is considered a “risk-free” asset — meaning financial institutions do not have to keep any capital on hand to protect against a default.
If, suddenly, the U.S. could not make payments on the $16.7 trillion debt on time and in full, a vicious cycle would set in. Interest rates would go to the moon, the value of our bonds would collapse, as would the dollar. A run on dollar-denominated assets would ensue rapidly, including stocks, and the ensuing collapse would make 2008 look like little more than a sneeze.
The end result could be a hyperinflationary, Soviet-like collapse — for those who consider the alternative, a deflationary collapse, consider that high interest rates almost always coincide with high inflation — with commodities prices becoming unaffordably high and the American engine of economic growth grinding to a halt.
This would ripple throughout the world, maybe even leading to other monetary collapses, particularly in advanced economies.
A U.S. default would be perhaps the single most cataclysmic economic event since the Great Depression.
Would Obama let the default happen?
Now, if Congress did not agree to increase the debt ceiling, Obama wouldn’t let all that happen, would he? He would just raise it himself, or else prioritize payments to our creditors, right?
Obama’s own Treasury Department has issued a report making similar predictions in the event of a default. So why in the world would Obama precipitate one by refusing to pay interest on the debt when there’s enough revenue to do so?
Let’s consider the arguments against the administration actually pursuing both of the nuclear options once the debt limit was truly hit, either 1) refinancing existing debt up to the limit and paying interest owed to creditors and government trust funds out of revenue, or 2) falsely invoking the 14th Amendment to unconstitutionally raise the government’s borrowing authority.
The most important factor to consider is that the administration has repeatedly, explicitly stated that it will do neither of the above.
What about prioritizing payments?
The White House’s argument against prioritizing debt payments to creditors is that the government legally has no authority to do so, according to a recent Inspector General’s report on the Aug. 2011 debt ceiling debacle.
“While Congress enacted these expenditures, it did not prioritize them, nor did it direct the President or the Treasury to pay some expenses and not pay others,” the report states. “As a result, Treasury officials determined that there is no fair or sensible way to pick and choose among the many bills that come due every day. Furthermore, because Congress has never provided guidance to the contrary, Treasury’s systems are designed to make each payment in the order it comes due.”
So, the administration’s plan if and when the debt ceiling is reached is to fail to distinguish between the need to pay our creditors and building bridges to nowhere. Instead, “organizationally they viewed the option of delaying payments as the least harmful among the options under review,” according to the report. Or in other words, “no payments would be made until they could all be made on a day-by-day basis.”
To be very clear: Treasury here is saying it would fail to make payments on time and in full to creditors, which would most certainly constitute a default. Interest rates would rise rapidly, and credit ratings agencies would downgrade us overnight.
Next, if any more evidence was needed that Obama intends to default should the debt limit be reached, he has explicitly issued a veto threat against the “Full Faith and Credit Act” that would change the law and prioritize that payments be made to our creditors in the event of a ceiling-triggered cash shortfall.
Finally, instead of creating an escrow-like account to stockpile revenue to pay interest in the event the debt ceiling was reached, and paring back expenditures, it appears Jack Lew has engaged in “extraordinary measures” to prevent any slowdown of non-essential payments.
A local savings and loan could have figured out how to use an average $250 billion a month of revenue to pay $34.8 billion average interest owed, and yet it somehow has escaped the Treasury secretary’s attention. He’s apparently too busy raiding the federal retirees’ trust funds as the department did in 2011 to be bothered with actually constructing a plan that would avert a true default.
In other words, come Oct.17, there won’t be any cash reserves. Because the Treasury has already burnt through those, and has no backup plan. So, a default will ensue.
The 14th Amendment?
But what about invoking the 14th Amendment? This is the scenario wherein the Constitution would be interpreted to mean that Obama has the power to do whatever he pleases in order to ensure “The validity of the public debt of the United States, authorized by law … shall not be questioned.”
Never mind that this section of the Amendment was originally set up to ensure that debts incurred during the Civil War would be honored, and also to bar the federal government or any state from assuming the debts of the Confederacy. Or that, if anything, the 14th Amendment would require that principal and interest payments be prioritized and made to our creditors — no matter what.
There are several other problems with this proposition.
For starters, the Constitution empowers Congress, not the President, in Article 1, Section 8 to “borrow money on the credit of the United States.”
Further, Article 1, Section 7 gives the House of Representatives the sole power to originate legislation affecting “the raising of revenue.” And there is no question that adding new debt is new revenue.
To put the icing on the cake, “This administration does not believe that the 14th Amendment gives the president the power to ignore the debt ceiling — period,” White House Press Secretary Jay Carney said on Dec. 6, 2012.
So, there you have it. In order to maximize its leverage on Congress to pass a debt ceiling increase on its terms, the White House has painted itself into a corner, all but guaranteeing a default come Oct. 17.
But why default if it is unnecessary?
One hopes that Obama is bluffing. But, if we merely take the Obama administration at its word — and I think we should — if Congress fails to raise the debt ceiling by Oct. 17, Obama intends to default on the debt. Even though he doesn’t have to.
Again, it could all be a head fake. Yet, this is an administration known for never letting a good crisis go to waste.
Maybe Obama takes a long, historical view of crippling economic distress — and the likely political outcome thereof. The calculation here is Republicans would get blamed for a default, and Democrats could secure permanent majorities going forward to implement their agenda unimpeded.
Wouldn’t be the first time. After all, both the 1929 and 2008 market crashes ultimately resulted in gargantuan Democratic majorities in both houses of Congress, plus the White House.
But for the Depression and next the Great Recession, there likely would not have been the votes in Congress to pass programs like Social Security, Medicare, and now Obamacare. Bank panics in the early 1900s led directly to the creation of the Federal Reserve a century ago in 1913.
To the best of our knowledge, these were most certainly not deliberate, government-provoked financial crises to enable a power grab. But would Obama threaten or worse instigate an unnecessary default on our debt, crashing the global economy, merely for political gain?
If so, then he is not only a deadbeat, he’s evil.
Robert Romano is the senior editor of Americans for Limited Government.