Why Refusing to Raise the Debt Ceiling Will Not Result in Default on American Debt

By: Brian Woodward

 Barack Obama

The media, members of Congress, and the President of the United States have gleefully disseminated misinformation about what would happen if we do not raise the debt ceiling by October 17th. The biggest blow these lies encountered was when Moody’s, one of the nation's top credit rating agencies, released a memo on October 7th stating:

“We believe the government would continue to pay interest and principal on its debt even in the event that the debt limit is not raised, leaving its creditworthiness intact...The debt limit restricts government expenditures to the amount of its incoming revenues; it does not prohibit the government from servicing its debt. There is no direct connection between the debt limit (actually the exhaustion of the Treasury’s extraordinary measures to raise funds) and a default...The budget deficit was considerably larger in 2011 than it is currently, so the magnitude of the necessary spending cuts needed after 17 October is lower now than it was then”

What that means is that almost everything you have heard in any form of media from whatever slant it comes from (in regards to not raising the debt ceiling) has been absolutely wrong.

It is amazing to me that both parties in Congress, according to the polling data, are the ones that American’s blame the most. Americans have always hated Congress, at least in terms of the approval ratings they give, but it is the President who is supposed to lead, and he more than anyone else has been unwilling to be forthright about the situation.

Forget about the outlandish strategy of the Republicans to try to pass a Continuing Resolution that “defunds” the Affordable Care Act.

That is not the real issue here.

This fight is about America’s spending problem. It was then Senator Obama who voted against raising the debt ceiling in 2006 who said this "Increasing America's debt weakens us domestically and internationally. Leadership means that 'the buck stops here’.” He seems to have forgotten that he made this statement, because his remarks last week conveyed the complete opposite sentiment asserting, “Everybody should say one of the most valuable things we have is America's creditworthiness. This is not something we should even come close to fooling around with.”

Not only is he completely wrong about what would happen to the United States credit rating (see Moody’s research note), he has for political purposes reversed his rhetoric, apparently discrediting his views when he was a United States Senator. Individuals are of course afforded the right to change their mind due to changes in data, but at the least he should be willing to say he was wrong in 2006. Instead, he presses on as if he never put up that fight and made those statements about raising the debt ceiling.

He admonishes Speaker Boehner for his actions, but it can be easily argued that the Speaker is simply taking Obama’s 2006 remarks to heart -- “Leadership means that the buck stops here.”

Economists, excluding the rogue Paul Krugman, are laughing at the panic perpetrated by the politicos. Senator Richard Burr (R-N.C.) put it slightly vulgarly, and somewhat incomplete, but nonetheless made an effective point in stating "I'm not as concerned as the president is on the debt ceiling, because the only people buying our bonds right now is the Federal Reserve. So it's like scaring ourselves."

What most people do not comprehend is that the majority of the United States debt is owed to itself, meaning individuals and institutions that purchase treasury notes, the social security trust fund, civilians retirement funds, and of course as the Senator mentioned, the Federal Reserve are the largest holders of the debt. In totality, as of last year, entities of the United States own 65.8% of the national debt. Furthermore, contrary to what many of you have been told, China only owns 8.1% of our debt. The notion that they will or do “own us” is fallacious, their commitment to our currency is much more of a problem for them than us.

This is a fight for fiscal responsibility cloaked in the media as an attempt to repeal Obamacare. It is true that Senator Ted Cruz seized his opportunity at fame, or if you like, notoriety. It is also true that Speaker Boehner (due to the pressure applied by the “Tea Party”) has continually spoken about negotiating the terms of Obamacare. No thinking person anticipates any major, or for all intents and purposes, minor concessions on the health care law. However, individuals like our own Senator Tom Coburn understand the importance of fiscal responsibility.

Cutting spending is the goal of the GOP in this fight. I suppose this is when Obama apologists assert that he has “cut spending in half” or “reduced deficits in a historical fashion”. Anyone that is familiar with big data and statistics knows that “numbers” are quite subject to manipulation. From when President Obama took office to now he has cut spending in relation to GDP. However, his spending in relation to GDP is also the highest in the history of the republic.

The research director at the bipartisan Committee for a Responsible Federal Budget explains how easy it is to manipulate the data. He used an example of incurring a deficit of one percent of GDP in the first year of office and .5 percent after the four year term. He states: "That would look like a 50 percent improvement in the level...However, a change in deficits that went from 10 percent of GDP to 5 percent of GDP would also register as a 50 percent improvement – despite being a much larger change in relation to the economy."

The fact is that the deficit has increased by over $6 trillion dollars since President Obama took office. Prior to that George W. Bush held the title of biggest spender, incurring a whopping $4.9 trillion in 8 years. You do not have to be a financial guru to understand that this is an unsustainable path.

The blame should not be put solely on President Obama. Many Presidents and members of Congress have for years continued this policy of large deficit spending.

The pragmatic Republicans know that this is the time to make a stand for the sake of posterity. It is time to reign in the deficit. The United States will not default on its debt obligations if the debt ceiling is not raised.

Markets are often fueled by emotion and if the debt ceiling is not raised it is likely that the Dow Jones, S&P, and Nasdaq will decline, at least initially, in value.

The current market is inflated anyhow, and corrections are a normal part of our economy. The most likely scenario is that equities will fall initially if the debt ceiling is not raised. It will not be catastrophic, and as the focus on the debt ceiling debate resolves itself one can expect the markets to rebound quite quickly.

The United States has a deficit problem. It has to be dealt with at some point. If the Republicans play their cards right, the government shutdown and the refusal to raise the debt ceiling might just be a turning point in American fiscal policy.

However, I would advise that we do not allow hopes to get too high. Washington has a long track record of disappointment. 


Anonymous said…
Agree! I watch CNBC and their crowd that keep trying to scare the markets and of course the Media folks doing the same. You’d think that they are pushing for a major drop in the markets just to get their way. How about this time that the other side (not sure if that is the Republicans but might be the Conservatives) actually calls them on this and pushes for what is right for the country instead of succumbing to this nonsense. Not holding my breath!