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July 12, 2011

Debt Ceiling Increase? Why Not Just Say No?

A couple of months ago we posted a Wall Street Journal interview with investor Stanley Druckenmiller, the upshot of which was that he didn't believe even a scenario in which went went so far as to technically default on U.S. treasuries (e.g., by not making an interest payment when due) would have far-reaching negative consequences if it was seen as a sign we were getting our fiscal house in order.

"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.

With this in mind as I watch this latest round of Kabuki theatre in D.C., I'm beginning to wonder if the best course of action isn't for the house GOP to just draw the line on the credit limit at $14.3 trillion and call it a day. And it seems I'm not alone.

The Heritage Foundation blog and Kevin Williamson at NRO both recently commented on this option. First Heritage:

... Fox Business News senior correspondent Charlie Gasparino wrote in a New York Post piece some days ago that “just about every private-sector economist I speak to says that Treasury could simply use its ample cash on hand to pay off our creditors first—then begin to prioritize payments for the military and various social programs.”

This view appears to be shared in spades by the credit markets, which so far have reacted to the Obama-media scare tactics with a big yawn. When the markets fear real default, they respond by jacking up interest rates, as we’ve seen in Greece, Italy, Portugal, etc. It’s happening right now in those countries.

Keep in mind that a refusal to raise the debt ceiling does not equate to default. Like the Heritage piece points out, this is a scare tactic from the left and the MSM (but I repeat myself) designed to browbeat the GOP into caving on tax and spending increases.

Williamson adds some thoughts on what awaits us if we continue to rack up debt:

The debt ceiling we’re talking about right now is statutory. There’s a law that says the government can only borrow so much. But, as I have argued before, there’s another debt ceiling — the real debt ceiling, the One True Debt Ceiling, the one that you cannot raise with a vote in Congress. There are signs that we’re getting ready to bump up against it.

Jim Pethokoukis, who has been doing some stellar reporting on this issue, yesterday noted the following commentary from a Goldman Sachs research note (emphasis Jimmy P.):

There are essentially two plausible outcomes. One is that the two sides agree on a deal in coming weeks, with headline cuts of $2+ trillion over a 10-year horizon, probably mostly composed of discretionary spending caps that gradually squeeze projected outlays in a highly back-end loaded fashion. The other outcome – whose probability has unfortunately risen in recent weeks – is that there is no deal by August 2. Even in this case, we continue to believe a default is extremely unlikely, as the Treasury would likely prioritize interest payments, Social Security and Medicare payments, and “essential” defense payments over other types of spending, and should have enough revenues to cover the essentials. But make no mistake: the negative consequences of failing to make other payments would be very severe. In the month of August, projected outflows exceed projected inflows by about $150bn (not annualized), or about 12% of GDP. Even if we allow for a further decline in cash holdings in the Treasury’s account with the Fed, this means that a failure to reach a deal would imply a huge, immediate fiscal retrenchment. The economic consequences of such a retrenchment would likely force a deal within a few days.

The real issue the politicians are trying to avoid isn't default. It's a government shutdown.

Dick Armey was on CNBC this morning and had a good line that I'll paraphrase - liberals only know of two kinds of government programs: ones that are too big to cut and ones that are too small to cut. The ones that are too big are said to be so vital that they can't be cut, and the ones that are too small are said to not make a difference in the grand scheme of things. Therefore, nothing ever gets cut.

Armey was right but, unfortunately, this isn't an affliction that only affects the left side of the aisle.

Would it really be so bad to just force this bloated pig of a federal government to prioritize its expenses for once?


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posted by Andy at 11:35 AM

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