Phantoms & Lies of Hitting the Debt Ceiling

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Posted on October 15, 2013 by

On Oct. 17, the United States will reach a deadline to raise the debt ceiling. At this time, Congress will have to authorize the federal government to continue accruing debts to fund our massive deficit spending. Naturally, the Obama administration has pursued a concerted policy of fear mongering by predicting default on Social Security checks and interest payments on the national debt. The US Treasury Department declared that a default would result in a recession, and President Obama told Wall Street that they should be concerned about the mere possibility of default.

The mantra continues quite simply that “We must borrow money to pay the interest on money that we already borrowed.”

These doomsday predictions are, quite bluntly, complete fabrications. If the debt ceiling is not increased, the United States will not default on its debts and Social Security checks will remain intact. Unless President Obama willfully chooses to defy the Constitution and bring about the apocalypse he envisions, there will be no government default.

If the debt ceiling is reached, the United States has certain obligations which it must pay. A failure to pay these obligations would result in default. The media and government claim that there is no law in place to prioritize these obligations, but they clearly have not read the Constitution since the 1860s.

The Fourteenth Amendment to the Constitution states: “The validity of the public debt of the United States… shall not be questioned.” This clause referred to the debts the United States incurred during the Civil War. Under this provision, the administration would be legally obligated to make payments on its debts even if we reach the debt ceiling.

What exactly are these debts? What qualifies as a legal obligation by the United States government? Interestingly, the answer comes from the very liberal Paul Krugman, as he attempts to widely construe our debts. He identifies both interest payments on bonds and Social Security payments as debts which must be paid. Krugman admits that the Treasury Department could “pay off bonds in full,” but he argues that “Social Security benefits have the same inviolable legal status as payments to investors.”

Bonds

First, let’s examine the situation with regards to bond payments. Obama’s fear mongering over default involves the declaration that our credit rating would be down-graded if we do not raise the debt ceiling. This would result in higher interest rates on the debt in future. However, Moody’s Investors Service, a major credit rating agency, disputes that claim. They assert: “The debt limit restricts government expenditures to the amount of its incoming revenues; it does not prohibit the government from servicing its debt.”

The Fourteenth Amendment makes clear that the government must service its debt. Since the US has approximately $222 billion in monthly revenue, with debt service payment obligations of only $35 billion suggestions that the American government might fall into default are patently absurd, unless Barack Obama willfully ignores the 14th Amendment in order to make his “gloom and doom” projections come true.

Social Security

Second, Social Security would not be destroyed by the debt ceiling. Shocking as it may be to many of you, the Social Security Administration actually runs on a surplus. According to Reuters, payroll revenue (what those of us with paycheck deductions see marked as FIFA on our paystubs) will bring in $38.8 billion more than the SSA must pay in benefits. I recognize that this is incredibly unintuitive and deserves some explanation.

Social Security payroll revenue is held by the Treasury Department in the Social Security Trust Fund. Generally, this money is raided by the Treasury Department to pay for other programs, which is why there is such uncertainty in the stability of the Social Security system. However, if the debt ceiling is reached, and the administration does not intentionally violate the 14th Amendment, all Social Security revenues must be paid out to recipients as Social Security benefits.

Given that the program takes in more revenue than it pays, it is again ridiculous to suggest that payments from the Social Security system to recipients would default, unless, of course, President Obama deliberately ignores the 14th Amendment to transform his scare tactics into reality.

The Debt Ceiling

This is not to say that the debt ceiling would not have an impact on our government spending or the economy. The government would have to make drastic cuts to its spending very quickly, but this would not result in a default.

What we’re doing is borrowing money to pay interest on our debt. That’s similar to a family whose credit cards are maxed out applying for a new credit card to pay the interest of their debt. That is not a long range plan for financial sanity, for the family in our example or for America.

Imagine that that family throws a fit when they are denied their credit card, and you will have a pretty good understanding of the administration’s debt ceiling argument.

Capital dome and new $100 bill

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