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  • The U.S. Government Debt Default Bogie Man Scares No One

    Ever since the debate over the debt limit began in earnest at the start of the year, the Obama Administration, led by Treasury Secretary Tim Geithner, has implied that the U.S. might default on its publicly held debt. In his press conference today, the President said that “it is not acceptable for us not to raise the debt limit and to allow the U.S. government to default. We cannot threaten the United States’ full faith and credit for the first time in our nation’s history.”

    The fear of default and the catastrophic consequences that would follow, they hoped, would force congressional Republicans to cave on accepting tax increases. Much to the apparent frustration of the Administration and to the surprise of many conservatives, it hasn’t worked.

    Why didn’t the debt default bogie man scare the Republicans? It did, at first. Especially as the farce was repeated over and over even by voices in the media who should have known better—and probably did. But eventually the facts won out over fear.

    The facts, in fact, are plain enough. In the unlikely event that the U.S. government would hit the real ceiling on August 2 as advertised, the federal government would still be on track to collect about $2.2 trillion in the fiscal year. That wouldn’t change. And net interest for the year would still be about $205 billion, or less than a tenth of incoming revenues. And in light of the consequences, there is no doubt that President Obama and his Treasury Secretary would ensure that the interest payments are made on time and in full.

    Thus it should not be surprising, as 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.

    In sharp contrast, U.S. long-term rates are actually falling. The 10-year Treasury bond rate, which only a few days ago was around 3.15 percent, has dropped 20 basis points to 2.95 percent. Maybe the markets just aren’t paying attention. Or maybe they know Obama and Company are blowing smoke. Whether the debt ceiling is raised on time or not, markets are confident that the interest will be paid.

    Geithner’s argument was phony from the start. If that’s the best the Obama Administration can do, no wonder Republicans are holding firm.

    Posted in Economics [slideshow_deploy]

    20 Responses to The U.S. Government Debt Default Bogie Man Scares No One

    1. Stirling says:

      It really offends me (as an American) that this administration purposely wraps our debt service to bondholders in the same "Default" stance as our Total Government spending. It's a false choice to the GOP to negotiate under a "Sky is falling" premise when its clear we are not. But this has been the MO of this administration since day 1 to use the "end of the world, must pass something or else" arguement to force feed the american people this agenda.

      • JBurton says:

        what agenda? That the wealthy that caused the financial meltdown should be taxed…they aren't creating jobs. They are STILL seeing gains in profit, its just going to their top people. You must think you are one of them or something. You aren't. Listen to President Regan's message on raising the debt ceiling. READ http://www.huffingtonpost.com/2011/07/20/federal-… and http://front.moveon.org/hey-republicans-ronald-re… the money won't be there…unless you are suggesting simply printing more? We've already lost our homes and jobs to these "job creators" they got their horrible mistakes band-aided by the government and continued to take vacations and get raises and cut jobs despite continued growth. One side of the spectrum has to pay for that band-aid…either the poor or the wealthy. Warren Buffet and Bill Gates agree with increased revenue through higher taxes…whats the matter? The country agrees…who is the GOP to try to override our good credit(S&P has already downgraded us) and make tax increases on the rich impossible. We were on track under Clinton. GWB gave all progress back in the form of tax breaks and refunds…what happened to employment then?

    2. Jeff says:

      I would point out that the Treasury can write checks with new money anytime it wants … How do you think QE1 and 2 were paid for ? We didn't borrow a dime to buy those bonds … they fired up the printing press …

    3. GriperBlade says:

      Yeah, that's why Wall Street is beating the GOP's door down to get them to back off and play sane — because no one's afraid of the default "bogie man."

    4. Bobbie says:

      Why would the Secretary of the Treasury of America, Mr. Tim Geithner and the President of America, Mr. Obama, admit and show such irresponsibility and incompetence in not paying off their debt they directly put on America, then use their irresponsibilities to scare American citizens? Then suggest increasing taxes to continue to cover up their unconstitutional acts of irresponsibility? America won't survive with unprincipled, unethical, totally deceptive leadership.

    5. George Colgrove, VA says:

      We must stand firm on a balanced budget for 2012 with no new taxes. We need to cut the size and scope of the federal government. If we have to, we must shut down the federal goverment for the balance of the year except for essential services. What is non-essential should be noted for removal.

    6. George Colgrove, VA says:

      For a definition of Bogie Man go to: [ http://en.wikipedia.org/wiki/Bogeyman ] The truth of the matter is that Obama is the Bogie Man. Bush was the Bogie Man and the next President will be the Bogie Person. Yes, these people have a huge responsibility in creating and growing this mess, but the true perpetrators are the people working for the federal government. Every harebrained idea, bloated budget, egregious spending policy, regulation, statute interpretation, approved invoice, high paycheck, even higher benefits package and so on were created by federal workers. The reason why this is not working is because of federal workers.

      • George Colgrove, VA says:

        The same incompetence we saw in Katrina is the same incompetence we see in the current workforce. When you live here in DC, you are overwhelmed by the amount of worker training that goes on in the federal workforce. They get so much training paid for by us the taxpayer and by debt that these workers should be the most efficient workers ever. However, they have more than twice the number of workers they need in program plagued by bloated and inefficient procedures. The budget problem will not go away with tax hikes or raising the debt ceiling. It will come from getting this workforce under control. Pay them what they would get in the private sector and force them to become more efficient. This can be accomplished by cutting the size of government. Start!

      • Ron says:

        ie….the United States Postal Service!

    7. Michael Hutchinson says:

      what makes a nation have it's identity, is all the people work, !! All pay a fair share of taxs for our needs to defend her shores. We must believe in a higher purpose, we are created and selected to have a role.
      Since the exodus, those slaves were the only other slaves other than our american black bretheren. If it were not for the christian black slaves who cried out and spread christianity across this nation, and those who died for that liberty. The big mamas and the mean ole grannies and those that stopped Hitler are now gone. Lets pray together and teach our youth to be financially wise. Morally, we have become a repeat of old Testiment Greek and Romans.God gave us this nation POINT! How many of us as we get brought back to our knees; are going to cry out to GOD! Black christian and white christian America, We are his church, HISTORY! We will take care of each. AMERICA.! Spend my tax money for the hopeless youth to learn that this country is theirs. Dark Ages are here again, This is gods wealth in this NATION! Herman Caine, is a man to lead, Embace him! and Michele Bachman.
      I believe in GOD WE TRUST ! Those two Americans speaks his name! The GOD of my REPUBLIC!

    8. Timmy says:

      Well Dr. Foster you are right about the income and outgo requirements but you conveniently forget to mention a few things namely the currency markets. What do you think overseas investors will do to the dollar if we come to this point, eh? nothing?? In case you don't know , which i am sure you do,
      a likely scenario is simply this the us defaults the dollar drops past support levels, automatic electronic trading programs kick-in and short the usd which will push it lower which in turn will cause other speculators to short as well. Do you not remember the thai meltdown Soros and his ilk made billions riding the currency to the ground. Do you think they would not do the same to the dollar?? Go ahead prove your political point but do not complain when you need a garbage bag full of money to buy bread for your family.

      • G Ware says:

        I suspect the dollar will gain not loose as the investment community notes that the US is finally taking action to get it's financial house in order… Remember the administration policy of using all bad situations to leverage their socialist political agenda. Just the same ole political game…

    9. charlie says:

      Quit blaming "all" federal workers. I won't speak for D.C., which is inherently dysfunctional. But, a few noteworthy federal employees do exist and in fewer numbers now than 35 years ago. U.S. Forest Service personnel take care of almost 19,000 acres "per person",,, one of the most dismal ratios of developed-nation land stewardship in the free world. So don't lump them all together.

      • slickmeister says:

        There is a percentage – maybe 25% of non-military federal bureaucrats who are actually necessary, forest rangers being among them.

        But the vast majority who push paper around and harass businesses with endless regulations are not only a drag on the economy but absolutely useless and counterproductive.

        Problem is, O'Bummer and the rest of the Marxist Democrats not only think we should continue to pay these government bureaucrats DOUBLE what the rest of us (who pay their salaries and gold plated benefits) make in the real world, they want to massively EXPAND the federal bureaucracy – despite the fact that we've gone over the limit on our national credit card.

        That's foolish, wasteful and it has to be stopped.

    10. RedBaker says:

      Democrats are allowed to lie by the "news media", such as saying we will default unless the debt ceiling is raised. The US has over $900 billion in liquid assets – credit market securities, and international reserve assets. We have $2.2 trillion in revenues. The federal government owns millions of square miles of land. There are plenty of ways to pay the interest.

      The US government is bankrupt. Debt is six times income and soaring. It borrows almost half its spending. We must reorganize, based on the Constitution and sound financial principles.

    11. steve h says:

      You call a default on our debt a 'boogie man'? That's sad. Defaulting on our debt would be a desaster and would greatly increase our deficits and debts. We need to keep track of the fanatics who oppose raising the debt limit and make sure they lose their seats for putting the country at risk. Reagan increased the debt limit more times than any other president – far more times – yet it's the fans of reagan who oppose raising it under Obama. Clearly, the fanatic right are out to destroy our country.

    12. Reid says:

      The rating agencies are already threatening to down grade US credit. Look what happened to Europe. Government credit ratings have a real world effect on interest rates. Taking this to the limit will cause rates to go up and will probably spark a real world recession. Wall Street doesn't want it.

      Just because the Heritage Foundation and its circle of delusional Think Tanks don't believe in the real world, doesn't mean that the real world doesn't exist.

      Stop playing with the good faith and credit of United States. Raise the debt limit and pass balanced budgets in the future.

      The Republicans completely misunderstood the meaning of the 2010 election. The public was angry with the Democrats for letting the Recession get as bad as it did.

      They won't absolve the Republicans for causing the next Financial melt down.

      I'm a Republican, but I would like some adults to stand up for this country and keep the US a great power.

      Stop putting the greatest nation and economy at risk for an ideology that simply makes no sense to anyone.

    13. Tim says:

      This is an irresponsible position.

      1)" The facts, in fact, are plain enough. In the unlikely event that the U.S. government would hit the real ceiling on August 2 as advertised, the federal government would still be on track to collect about $2.2 trillion in the fiscal year. That wouldn’t change. And net interest for the year would still be about $205 billion, or less than a tenth of incoming revenues. And in light of the consequences, there is no doubt that President Obama and his Treasury Secretary would ensure that the interest payments are made on time and in full."

      First, you're double-counting interest income. $2.2 trillion is the total federal revenue – income tax, payroll tax, corporate tax, others, and interest income too. So, the "net" interest income isn't relevant, we need the gross. In the 9 complete months of this fiscal year (Oct-Jun), that's $386 billion http://www.treasurydirect.gov/govt/reports/ir/ir_… . But, fortunately, it's lumpy and the two big months have passed. The full fiscal year will probably be around $480 billion (disgusting, but I digress).

      The bigger problem, of course, is that if you shrink federal spending all at once from whatever ridiculous level it's at today down to a mere $1.7 trillion, you'd see the economy take a nosedive, which means that you'd not receive anything like $2.2 Trillion in revenues. So, you'd still need the debt ceiling to go higher, just to pay interest.

      And that's not even accounting for the market taking fright, which I believe is a real threat. Would you lend to someone who had room to borrow, but cut up all his credit cards? He has no flexibility to handle anything unexpected – what if he gets sick(er)? Etc… But as I mentioned above, there's no way to get around raising the debt ceiling (except default).

    14. Nick says:

      Why do we need new tax increases, on anyone, even though we're supposed to be cutting government programs/spending? I thought the whole purpose of cutting is to cut back on everything, so why do you, mr. Obama, need more of my money?

    15. Dan says:

      This is nonsense. Hack journalism.

      The fact of the matter is, when the economy tanked, the people who were hit hardest are the ones paying their debts to society now.

      There are so many reasons why people who believe things like this are so awfully misguided.

      The stimulus and debt incurred under Obama's watch is primarily a knee jerk reflexive reaction which was taken in response to unfavorable economic conditions… necessary to avoid meltdown A great depression has been mostly avoided, and now we're looking at an incredibly delicate economic climate. If people took this approach, we would have let the banks fail, millions of Americans would have NO money, and we would have slipped into chaos. Sounds exactly like what's being suggested right now… let the U.S. default and everyone else pay much higher interest rates. We can take the risk and call out those people who are lying about how much money there is left to spend before we're officially bankrupt.

      Of course, that PhD might provide access to information about the treasury and federal reserve that bernanke and geithner don't have… not sure what clearance level of piled higher and deeper that allows, though.

      A cut to entitlement programs and social safety net programs for people who have already been tossed from their jobs, their homes, and their livelihoods, well, that is just f(#*@d up, my friends.

      Individualism, narcissism, racism, republican-ism… these are the -isms damaging our nation most. We haven't had terrorist attacks on our soil for a long time. We've had plenty of attacks of individualism and republicanism in the past few days alone. These things our ruining our nation. Time to pay the bills… especially the rich.

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