There’s been a lot of talk about the US defaulting on its Treasury debt. As Greg Ip wrote at economist.com:
A default would result from failure to pay principal or interest. The debt ceiling doesn’t bar either. Treasury can roll over maturing issues so long as the overall stock of outstanding debt doesn’t rise. (A caveat: Treasury must invest surplus Social Security and Medicare taxes by issuing non-marketable debt to the plans’ trust funds, which erodes the remaining capacity for marketable debt.)
But, if we take a closer look at the chart below by Lou Crandall of Wrightson ICAP, we can see cash receipts are higher than interest payments:
So, here’s 3 reasons the US won’t default on its Treasury debt:
1) Treasury Can Easily Remain Current on Existing Debt
The Treasury will not have a problem with the existing debt so long as it can suspend some non-interest outlays. We don’t see that being a huge problem.
2) The United States has NEVER Defaulted
While this does not say anything about the future, the US has laws in place which make default less likely. Greg Ip lays out the laws:
- The Fourteenth Amendment to the US Constitution: “The validity of the public debt of the United States… shall not be questioned.”
- The Supreme Court: bars Congress from voiding a government bond.
- The Prompt Payment Act: stipulates the interest penalties on late payment to commercial vendors.
- The Internal Revenue Code: stipulates the interest penalties for late tax refunds.
These laws give us reason to suspect lawmakers will do everything possible to prevent a default.
3) The US Cannot Afford to Default
Lastly, the US government “now has to borrow about 40 cents of every dollar it spends.” A default would trigger a long chain reaction of hell. Borrowing costs would rise, taxes would need to rise, and the government would be in a very chaotic state.
So, based on these 3 facts, we think the US is very unlikely to default on their Treasury debt.
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