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Debt Negotiations and Third-World Predictions

Here is a letter to the Sun-Sentinel:

In response to the current fiasco taking place in the debt negotiations, the Sun Sentinel predicts America plunging to “Third World” status if the debt ceiling is not raised.  In fact, the editorial asserts raising the debt ceiling shouldn’t even be in dispute (Debt negotiations fiasco is bad, but worse is potentially around the corner, July 27).

Undoubtedly, the American public’s general lack of interest in fiscal policy in favor of “sensational crime trials and prime-time singing competitions” fuels this political circus.  However, the U.S. will hardly default on its obligations if the debt ceiling is not raised.  The Treasury can prioritize payments to cover interest on the debt ($30 billion) out of 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.

The real evidence, however, is in the bond market.  The ten-year T-Note currently trades at a premium with a yield of approximately 3%.  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, and even less fear of the United States devolving into a Third World country.

Painting doomsday scenarios and employing hyperbolic language such as “cataclysmic deadline” and “devastating default” only serves to undermine the process.

Sincerely,

Craig D. Schlesinger

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