Friday, May 26, 2023




Today the Wall Street Journal editorial board makes a point that I also have made repeatedly on this site: there is zero chance of a default on sovereign debt arising out of the current budget impasse in Washington. The press hysteria, which we have seen before, arises out of a deliberate misuse of the word “default.”

The editorial board writes:

The debt talks are stalled and President Biden is again threatening to invoke the Constitution’s 14th Amendment to pay interest on America’s debt without Congress raising the debt ceiling. The truth is that the Treasury has more than ample revenue coming in each month to avoid defaulting on the debt, and Mr. Biden doesn’t need to distort the meaning of the 14th Amendment to do it.
Section 4 of the Amendment says that the “validity of the public debt of the United States, authorized by law . . . shall not be questioned.”

This means the Treasury cannot repudiate debt held by the public as issued in Treasury bonds and notes. In practical terms this means Treasury Secretary Janet Yellen must prioritize debt repayment once statutory federal outlays exceed federal revenue. In other words, she and Mr. Biden can’t willfully default even for a time without violating the 14th Amendment.

If the government runs short of money, it must, and will, continue to pay interest on the debt. New debt can be issued as existing bonds mature; that does not add to the total debt. The effect will not be a default. Rather, the result will be, for example, that diversity consultants will have to wait a while to be paid.

The federal government has, and will continue to have, vastly more money than it needs to pay interest on the debt:

Treasury has more than enough cash to do this. Federal tax receipts in March were $313 billion and interest payments were $67 billion, according to Treasury’s monthly report on revenue and outlays. In April receipts were $639 billion and interest was $62 billion. It would be the height of fiscal irresponsibility if Treasury failed to use that cash to meet U.S. contractual debt obligations. Mr. Biden and Ms. Yellen would also be violating the law.

If Joe Biden and the Republican House don’t reach an agreement (even though the House has already voted to raise the debt ceiling), the result could be a partial government shutdown of the sort we have seen several times in recent years. Those partial shutdowns have done little or no damage; in fact, a lot of conservatives have wished they would continue.

So don’t listen to the hype. There is zero chance of a default on U.S. debt.

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