The Real Debt Ceiling

What will happen in a decade or so, when default becomes inevitable? 

Kevin D. Williamson writes: The fight over the federal shutdown, in which Barack Obama pronounces himself ready to negotiate with atomic ayatollahs in Tehran but not Republicans in the House of Representatives — the body constitutionally empowered to manage budgetary concerns — is a prelude to the coming fight over the statutory debt ceiling. How either of those will play out politically is anybody’s guess, though one should never underestimate the Republicans’ ability to screw up being on the right side of an issue.

While there is panicky talk of default in Washington, the financial markets give no indication that they are expecting a default on Treasury bonds, which is only sensible: Even without extending the debt ceiling, current revenues are more than enough to cover debt payments, several times over. There are technical concerns within the federal government that complicate the issue, but debt ceiling or no debt ceiling, the money is there to make interest payments. Surely an administration that came into office on the heels of a financial crisis and claims the unilateral power to assassinate American citizens is not waiting on Congress to tell the Treasury Department how to perform its most elementary function? Surely the American people, in their wisdom, would not elect such irresponsible amateurs to high office? (Twice?)

Refusal to raise the debt ceiling will never necessitate default — unless the interest payments we owe exceed the revenue we have. That is not even close to being the case — net interest payments have been running around 7 percent of revenue lately. But if current trends continue, that number will change. In 2010 Moody’s, working from Congressional Budget Office projections described by one analyst as “wildly optimistic,” calculated that policies being pushed by the Obama administration could drive interest payments as high as 20 percent of federal revenue by 2020. The CBO’s polite-nod-to-reality “alternative fiscal scenario” projects that sustained deficits will mean that interest payments will cost us an additional 1 percent of GDP in ten short years. And those are far from worst-case, Chicken Little scenarios. A return to the interest rates that prevailed as recently as the 1980s would turn our federal budget upside-down practically overnight, with interest expenses far outpacing tax revenue. When debt-service costs exceed revenue, default is a practical inevitability. Read the rest of this entry »