Does August 2nd mean a United States default?

Posted: July 21, 2011 in Economics, Politics
Tags: , , , , , , ,

According to the Bipartisan Policy Center the answer is technically no. If for some reason the US Congress cannot decide on what way to raise the debt limit the US Treasury department will not be able to roll over its current debt.  Basically, the Treasury will no longer be able to pay existing US bond holders their principle plus interest due with money gained from issuing new bonds because that would take the US further into debt. That is like you or me paying off a loan by going out and getting a new loan.

Politicians will argue that when the US Treasury loses this ability then the US will default. This is however, technically incorrect. The US Treasury will be able to pay all of its $30 billion dollars in bondholding due the month of August at the expense of other programs from direct funds received from taxation. This would stop the US from going into a technical default and buy the Congress time to get its act together. Again, this will come at a great expense. Approximately 44% of spending will need to be cut for the month of August if a debt agreement is not reached.  Also, if we do pay off the bondholders this does not mean Social Security will not get paid. Instead it just means something else like unemployment insurance, military pay, or some other expense will not get paid.  Below is a list of what could potentially get paid and cut come August 2nd if an agreement is not reached.

  • Interest on Treasury Securities                                                  $29.0 B
  • Social Security Benefits                                                               $49.2 B
  • Medicare/Medicaid                                                                     $50.0 B
  • Defense vendor Payments                                                          $31.7 B
  • Unemployment Insurance Benefits               $12.8 B Everything Below cannot be afforded
  • Military Active Duty Pay                                                              $2.9 B
  • Veterans Affairs Programs                                                         $2.9 B
  • IRS Refunds                                                                                    $3.9 B
  • Food/nutrition Services + TANF                                                 $9.3 B
  • Federal Salaries + Benefits                                                         $14.2 B
  • Small Business Administration                                                    $0.3 B
  • Education Department                                                                $20.2 B
  • Housing and Urban Development Programs                          $6.7 B
  • Other Spending                                                              $73.6 B

Items can be swapped back and forth depending on what one might think is more important to pay. Say you can switch Military and Veterans funding for a total $5.8 billion and take that money away from any other payment like Defense Vendors or unemployment insurance. The only one that is untouchable would be the interest on Treasury Securities.

Indeed, this would be messy, but the idea the President cannot guarantee social security payments will be sent out on August the 3rd is a lie. He can guarantee it if he wasn’t playing politics and using scare tactics in an attempt to win over senior citizens in this debt ceiling debate.

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