(David Mansdoerfer) – The question of the hour – can the United States federal government default on its debt? Today, after the federal government reached its debt ceiling of $14.3 trillion dollars, the United States is again faced with the question on how it will manage its debt payments.
In a letter to Senator Michael Bennett, Treasury Secretary Timothy Geithner noted, “A default would inflict catastrophic, far-reaching damage on our nation’s economy, significantly reducing growth, and increasing unemployment.” He goes on to state, “default would not only increase borrowing costs for the federal government, but also for families, businesses and local governments.”
At first, these seem like legitimate concerns. If you or I defaulted on our loans, we would be slapped with a penalty, see our credit scores lowered, and suffer the wrath of hundreds of collection calls.
There are, however, a couple of differences between an individual and the federal government.
First, the federal government can print money. This, in and of itself, provides the Federal Government with the ability to continue to make payments on its debt.
Second, the federal government can borrow from itself. Currently, Secretary Geithner is borrowing from federal pensions to cover the current debt payments. The government could also borrow from other income streams to help cover debt payments as well.
Beyond the ability to cover its debt by printing money and borrowing against itself, remember, the federal government also loans out a considerable amount of money as well. Is it really conceivable that the banks that depend on the federal government loans will be the same banks that force the federal government to default?
Furthermore, it is also important to note that the U.S. will not suddenly go into total default. The U.S. will still have the capability to pay its debt up to $14.3 trillion. Only they debt accrued after $14.3 trillion will fall under the ‘catastrophic’ concerns of the federal government.
Instead of falling for these alarmist and scare tactics, the Whitehouse and congress need to take this time to come to an agreement on how to reduce federal spending and the deficit. Only then will we be getting to the root of the problem.
The federal government is not California. It won’t suddenly start issuing IOUs because it can’t make its debt payments. If congress quickly raises the debt ceiling, all it is doing is putting off the real problem – too much federal spending.
(Mr. Mansdoerfer is the Director of Federal Affairs for Citizen Outreach)