Q&A of the Day – What Would Happen If the US Defaulted on Its Debt?
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Today’s Entry: @brianmuddradio I’ve not heard what would happen if the US defaulted on its debt. Also how much more are we spending compared to what’s coming in?
Bottom Line: The McCarthy-Biden debt ceiling deal has passed the House it will almost certainly do the same in the Senate – so for now, this prospect is once again about to be tabled for at least a year and a half. That said, your questions are great questions. And in answer to your first question about what would happen, the answer is we don’t know exactly and that’s for two reasons. First, we’ve never been in that position as a country and therefore don’t have context for how it might playout, and second, it’s subjective and the Biden Administration hasn’t publicly released a plan for how they’d prioritize paying the country’s obligations. In the event the Treasury isn’t able to take on additional debt to meet our existing debt obligations (which, btw if that sounds concerning...that we need to take on more debt to pay our debts, it is), it’s decision time. What bills get paid first with the cash flow the country has coming in?
While President Biden would likely choose to involve himself in the decision making, it’s Treasury Secretary Janet Yellen who’d be the actual arbiter of what gets paid and what wouldn’t. Until she produces a plan, and unless she executes on it, all we’re left with is speculation – which is likely why you haven’t heard much about this. However, there is a pretty good indication of what it might look like. We came close to this situation playing out in 2011. And while the debt ceiling situation was resolved before debt prioritization began, the Obama Administration produced a 53-page plan as to what would have happened. Here’s how they laid out the priority as to who would get paid first.
- Payments due on Treasury Securities
- Social Security & Medicare
- Other federal agencies
- Contractors/All other obligations
There’s an explanation that’s required for the rational to be understood along with a whole big ball of wax on entitlements as well. The explanation is this. The United States government has become so reliant on debt to fund operations that if it defaulted on the payments due to those holding government securities the implications could be catastrophic going forward as governments and investors from around the world would no longer trust that they’d be paid as promised when purchasing federal debt securities and thus would no longer invest in them. Delaying all other payments as/if needed would carry significant implications but not to the extent of meeting our country’s largely foreign obligations. This can be argued and debated but that’s the logic behind it. As for the big ball of wax that’s exposed with this. The entitlements.
As I’ve long discussed, the reason Social Security and Medicare payments could potentially be affected by this is because we’ve long been lied to. The Social Security Administration nor Medicare places money in an account accruing interest with your name on it until you're ready to collect. That’s just the way it’s commonly presented politically to us. They’re used as leverage for debt spending. Social Security is mandated under law to be “invested” in special issue government bonds, which allow for increased debt spending by the federal government. It’s a way to essentially accomplish the leveraging of the funds without having them specifically available within the general budgeting process. Due to the program is a series of IOUs as opposed to a trust fund, current benefits are paid by those currently working. As I’ve said for years when discussing Social Security, if it weren't a government program it'd be ID'd as a Ponzi scheme. Medicare is a slightly different version of a similar thing with funds used to buy new government issued bonds and current taxes going to pay existing needs.
Having to potentially come clean with the American people about this and potentially delaying payments to people reliant on those payments is the kind of political reckoning one can only imagine and likely is as huge of an incentive to avoid a potential debt ceiling default as anything. What’s somewhat unclear is how many of those priorities could be met from revenue on hand and for how long. However, in the 2011 plan, it appeared that the resources only existed to meet the debt obligations from securities. What I’ve outlined should not be taken to scare anyone because again, it’s still unclear what will happen (the most likely scenario is the raising of the debt ceiling before we get this far). But that’s likely why so little detail on what next steps would look like if a deal weren’t done is discussed. No one really wants to have the honest conversation about just far down the river we’ve been sold to pay for all of the free stuff that’s anything but free and endless amounts of foreign aid that comes from what’s anything but an endless supply of free cash flow. So, there you go.