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Home > economics, philosophy, politics > Debt Ceiling Reality Check

Debt Ceiling Reality Check

Here is a letter to The Miami Herald:

In response to the current standoff taking place in the debt ceiling talks, The Herald predicts economic end-times if the debt ceiling is not raised (Keep America Solvent, July 19).

However, it is vital to separate myth from reality in the face of this debate.  No doubt “rotten politics” drives the stalemate, but the U.S. will hardly default on its obligations.  The Treasury can easily prioritize its payments to cover the interest on the debt ($30 billion) first and foremost from the $172 billion it currently collects in tax revenue.  After which, remaining funds can be allocated for Social Security, Medicare, unemployment benefits, and payments to military personnel (according to the Bipartisan Policy Center calculations) – hence, no default.

Rating agencies can paint all the doomsday scenarios they please, but the evidence is in the bond market.  The ten-year T-Note currently trades at a premium (above par value) with a yield of less than 3%.  Stated differently, prices and interest rates hold an inverse relationship and signal the amount of risk in a financial instrument.  If fears of a U.S. default were real, the ten-year T-Note would be selling at a substantial discount to par, and yields would skyrocket.  Nevertheless, U.S. Treasuries continue to sell at a markup accompanied by low yields, indicating no fear of default in the markets.  Translation – we victimize ourselves with irrational fear of responsible economic policy.

Sincerely,

Craig D. Schlesinger

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