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Gosh I hate being a retired blogger. Without being pulled too far into a semantic swamp, let me assure our readers that the only way for the US Government to default formally (ignore that inflation might be considered a regularly occurring default by some) in two days is for the US Government to WANT to default. Here are two reasons:

(1) Cash is still coming in. As we’ve said before, none of us are seeing our tax payments fall during this shutdown. It sure is nice that we have institutionalized a world where you still pay for services not rendered. But that’s beside the point. Last time I checked our gross interest obligations were something less than 10% of the federal budget. Nothing to sneeze at, but tax collections are orders of magnitude above that. Only a budgetary invalid would have a problem rearranging cash flows so that we don’t formally enter default. And if this is the case, then we can all play that very fun game of, “How big is the fiscal multiplier?” Why? Because after we do pay our interest obligations, spending somewhere else, presumably something so important like the vital Department of Energy or Education, must get cut – and we all get to play totally ideological games of how devastating cuts to their budgets would be.

(2) A more subtle point is to reflect on the “Lock Box.” You guys remember that? Well, insofar as there is actually NO MONEY in the Social Security Trust Fund, which there isn’t, then that is actually a “good” thing if you are truly concerned about default! Here is why. Treasury, since it spends a heck of a lot more than it raises in “revenue” each year, needs to borrow from somewhere. And over time they have accumulated something on the order of $2 trillion of debt owedto the Social Security System. In other words, the taxes we pay into social security have long been greater than the payouts the system makes, despite the projections that this will change permanently in the future. In this case, rather than having $2 trillion of cash sitting around (or doing something else with the extra funds), the SSA lends the stuff to Treasury. The point being that we can play a little accounting trickeration for at least a half year of government operations before we truly face something resembling default. In this case, if the SSA redeems the debt owed to it by the Treasury, the official debt number will fall by the amount redeemed. Then, the Treasury can simply go to the normal credit markets to raise that much new money and pay its bills.

Indeed, if folks do not wish to pay attention to either point, but certainly point #2, then they have been lying to us or themselves when they argue that there is actually something “there”in the social security system. If ever there was a way to prove that there was something there, then this would be it.

But my two cents of course is that few people want to expend the mental energy to get to this point, but also were I a betting man I would put a few cents on there being some sort of heinous deal cut by the time the ceiling is hit, and we’ll all be wasting our blogging time and coffee breaks a few months from now having the same conversations.

I miss the trillion dollar coin. At least then I had a nice example to talk about in our Money, Credit and Banking class.

3 Responses to “If I Don’t Give You My Two Cents Here, Maybe We WILL Default”

  1. Harry says:

    At least the trillion dollar coin (It could have been made with three bags of sand and one bag of cement and one bag of coarse gravel) would have been honest.

    Think about this in concrete terms. The big spenders of trillions (!) want an increase in their credit limit. If you or I were to ask a banker to do this, the banker would ask us to disclose (Thank goodness for Dodd/Frank!) our other obligations to our creditors. If we were like the government, we would have to disclose the first mortgage on the house of the first marriage to the first father-in-law, the court-ordered child support and alimony payments to the first wife, the next two trophy wives and their ten children, the IRS tax lien on the business for using withheld payroll taxes to pay for the yacht, and the big house in Boca Raton. To this question you answer,, “I am going to screw around twice as much as I did before, and I wish that somebody else is out there to pick up the tab. I need a bigger yacht to house my girl friends, and more capacity in my boat’s wine cellar.”

  2. Scott says:

    Great post – is there any chance we won’t see this sort if issue recurring in future months/years? It seems the only end to continuously manipulating the natural price of money and irresponsible spending.

    Money credit and banking was the best course I ever took. Once we consider that money is emergent, a result of spontaneous order rather than human design, it fundamentally changes ones perception of the entire financial ‘system.’ Sciencey goodness in plenty. But it’s better not to worry too much about these kinds of things I have decided.

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