Government Default Will NOT Happen

Freedomworks -Default won’t happen.

This chart shows why the U.S. Government will not default on its debt, should it hit the statutory debt limit set by Congress (a limit that the Treasury Department suggests may be reached later this month).

Why Default Won't Happen


(Click on image to see larger version.)

Look at the spending bar on the far left, marked “Interest on Debt.”

Now compare it to the green tax revenue bar above it, marked “Income.”

The two bars aren’t even close in length.

Uncle Sam takes in vastly more money each day than he needs to pay principal and interest on U.S. government bonds.

That’s what a “default” is — failing to pay your creditors on time.

In a scenario where we arrive at “X day,” meaning the day when the statutory debt limit is reached and the president can no longer legally borrow on the credit of the United States, the president would not default.

Rather, he would be forced to decide whom to pay first, and whom to pay later when sufficient funds become available. This is called prioritization.

No statute bars the president from prioritizing holders of U.S. government bonds over others to whom the government also has financial obligations. Some lawyers contend that the U.S. Constitution actually requires him to do so (14th Amendment, section 4). 

Regardless of the law, every president, including the current one, has sworn publicly never to do anything that would diminish the “full faith and credit” of the United States.

Note the word “faith.” That’s a word from the world of contracts.

Note the word “credit.” That’s a word from the world of finance.  

Note the word “and.” It narrows the meaning of the phrase.

Note the word “full.” It also narrows the meaning.

Clearly, “full faith and credit” is a term of art, with a specific meaning.

What is its meaning? It means “always paying back those who have lent you money, on time, in full, according to the terms of the contract, without fail.”

While other kinds of government payments — paychecks, benefit checks, reimbursements, financial grants — are often subject to the terms of a contract and thus matters of “faith,” they are never matters of “credit.” 

Take an extreme example. Let’s say the president is forced to postpone Social Security retirement benefits for two weeks, due to lack of sufficient funds. (Although that is very unlikely. Look at the chart again.) Retirees will be inconvenienced, to be sure — in some cases severely so. They may cry, “Breach of faith!” But no one could truthfully cry, “Default!”

Those who talk loosely of “default” fail to note that markets don’t care very much about non-debt-related obligations. They care a lot about debt-related ones.

Uncle Sam has never yet missed a bond payment. (Okay, he did once, in 1979, but the amount was so small and the delay so brief that it had no discernible effect.) But he has of course missed other kinds of payments. The world did not end.

Has the IRS ever been late in sending out a tax refund?

Has Medicare ever been late in reimbursing a doctor or hospital? 

No serious person regards those as “defaults.”

Delaying tens of billions in Social Security benefits would not rattle financial markets one-tenth as much as would a failure to make a tiny debt interest payment on a set of U.S. Government bonds.

Every president is determined to protect the government’s “full faith and credit” because it reflects on his performance. A default would be a black mark on his legacy.

In the event he runs out of borrowing headroom, the president will prioritize.

Default won’t happen.

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