To average Americans, the debt ceiling controversy sounds like this very frightening thing, in which failure to raise the debt ceiling is equivalent to a default. (Obama has done plenty to equate these two concepts in the public’s mind.)
Nonsense. If Obama defaults it will be by choice. Our tax receipts far outstrip our debt service payments:
IRS revenues for the calendar 2012 tax year will probably be around $2.3 trillion. That equates to over a five and a half times debt service coverage. So having enough money is not even close to the issue.
It’s not that we won’t have money to pay bondholders. It’s that we won’t have money to pay bondholders and maintain government at the bloated, absurd, and unsustainable levels that Barack Obama loves so much.
If we fail to reach a deal on the debt ceiling, Obama might have to make some tough choices about what parts of the government to cut. Government might shrink. (God help us all!) And he doesn’t want it to. He doesn’t want to make tough choices. He doesn’t want to make any choices. He wants to keep on keeping on.
But, although we look like the likely ones to back out of this game of chicken, Obama will have to blink first if we don’t. Because he will not — repeat not — be forced to stop paying bondholders, which would indeed ignite a global panic. If he does that, it will be by choice.
The linked article makes clear that nobody in the bond market thinks there will be a default any time soon:
If the giant bond funds like PIMCO and Blackrock which own hundreds of billions in Treasurys of all maturities were truly concerned about a cataclysmic event like a default, an orderly liquidation of portfolios would already be underway and 10 year rates would be going up and not down. Another barometer of bond market jitters is the interest rate spread between our 10 year Treasury note and the German 10 year bond referred to as the “Bund”. If the world was expecting turmoil in our treasury market then that spread would be expected to widen because investors would sell the falling Treasurys (rates go up) and buy the flight to safety instrument, in this case the Bund’s (rates go down). Over the last couple of weeks that spread has held steady, and in the last three or four sessions it has actually contracted by 6 or 7 basis points. The same exercise with the 10 year British instruments called Gilts yields similar results. A bond trader’s job is to analyze credit, and the markets are speaking loudly that right now there is ZERO worry of a U.S. government debt default.
If people in the know actually believed that Obama would fail to pay bondholders, despite taking in 5.5 times the amount of money he needs to pay the bondholders, U.S bonds would be rated “junk bond” status and giant bondholders would be dumping them. It ain’t happening because we ain’t gonna default.
Which is not to say we won’t hit the debt ceiling. It’s just to say that hitting the debt ceiling and defaulting are not the same thing.
BY THE WAY: One thing I like about the fact that this is coming along at the same time as the shutdown is the amusing way in which the White House’s talking points on the two issues collide. Here is the White House’s principal talking point on the debt ceiling:
- All the debt ceiling does is make it possible to pay for what Congress has already authorized. If Congress doesn’t like all the money that is being spent, maybe Congress should stop spending so much.
And here is the White House’s principal talking point on the
- The House of Representatives must fund the entire government. That is their job. I will not fund only part of the government because Americans should not have to pick and choose. They must fund it all, end of discussion. There will be no negotiation.
No journalist will ever pick up on this rather blatant contradiction. That’s why God created bloggers.
WELL, ISN’T THAT A HOOT: No sooner do I hit publish on this post (which I thought I had published this morning!) than do I see this, which kind of muddles the message of the post a bit: Fidelity sells off short-term government debt.
Isn’t it ironic?!
The point is, this is a vote of “lack of confidence” in Obama, not in Congress. Again, he is taking in multiple times the amount of money he needs to pay this interest. If he doesn’t pay the bondholders, it’s on him.