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Crazy Talk About Defaults, Prioritization, and Missing Social Security Payments

Per yesterday’s WSJ:

Top Bankers Warn on U.S. Debt Proposal
Finance Executives Warn Any Effort to Pay Bond Interest Before Other Obligations Could Pose Risk to Markets

By DEBORAH SOLOMON and DAN STRUMPF

Top Wall Street executives are warning that any effort to pay interest on U.S. debt before other obligations such as Social Security, a strategy some lawmakers think would placate bond investors if the government breaches its borrowing limit, would pose severe risks to financial markets and the economy.

In recent meetings with Republican lawmakers and Obama administration officials, chief executives of the nation’s largest financial institutions said putting some payments ahead of others would create insurmountable uncertainty for investors, drive up borrowing costs and cause market disruptions, according to people familiar with the meetings.

[…]

And Per Barack Obama during the 2011 debt-limit standoff:

“I cannot guarantee that those checks go out on August 3rd if we haven’t resolved this issue. Because there may simply not be the money in the coffers to do it,” Mr. Obama said in an interview with CBS Evening News anchor Scott Pelley, according to excerpts released by CBS News.

The Obama administration and many economists have warned of economic catastrophe if the United States does not raise the amount it is legally allowed to borrow by August 2.

Solomon, Strumpf, those CEOs, and our dear president are totally clueless.

First of all, per Elizabeth Foley, a law professor at Florida International University:

The “debt” that “shall not be questioned” under Section 4 [of the 14th Amendment] thus refers only to bonds and similar debt instruments. It does not include statutory “obligations” like Medicare, Social Security and other entitlements. These statutory obligations are not constitutionally protected in any way, and can be repealed, limited or otherwise altered by a simple majority vote of Congress.

[…] Section 4 does not grant the president dictatorial power to ignore the Congressionally established debt ceiling so that he can fund entitlements or other programs that he thinks Congress should fund.

In other words, not only can the president give top priority to interest payments on Treasury-issued securities, he is constitutionally required to do so — 14% of the Treasury’s $7 billion per day income-tax stream will cover it. Also, when a bond is cashed, the Treasury simply rolls it over, i.e., sells a new bond to retire that one — two transactions that cancel each other’s debt impact.

The thing to keep in mind about Social Security and Medicare is that both have incoming tax stream and trust funds of Treasury bonds that can be cashed whenever needed. So, there’s absolutely no excuse for missing any entitlement payments.

That said, it will cause economic turmoil when the government stops paying the rest of its bills, lays people off, and stops buying stuff. But, that what you get when you put people who hate “big government” in charge of a big government. They are all out to “starve the beast,” and that includes Obama, the architect of the Sequester.

Photo by Mark Morgan under Creative Commons license

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Crazy talk about defaults, prioritization, and missing Social Security payments

Per yesterday’s WSJ:

Top Bankers Warn on U.S. Debt Proposal
Finance Executives Warn Any Effort to Pay Bond Interest Before Other Obligations Could Pose Risk to Markets

By DEBORAH SOLOMON and DAN STRUMPF

Top Wall Street executives are warning that any effort to pay interest on U.S. debt before other obligations such as Social Security, a strategy some lawmakers think would placate bond investors if the government breaches its borrowing limit, would pose severe risks to financial markets and the economy.

In recent meetings with Republican lawmakers and Obama administration officials, chief executives of the nation’s largest financial institutions said putting some payments ahead of others would create insurmountable uncertainty for investors, drive up borrowing costs and cause market disruptions, according to people familiar with the meetings.

[…]

And Per Barack Obama during the 2011 debt-limit standoff:

“I cannot guarantee that those checks go out on August 3rd if we haven’t resolved this issue. Because there may simply not be the money in the coffers to do it,” Mr. Obama said in an interview with CBS Evening News anchor Scott Pelley, according to excerpts released by CBS News.

The Obama administration and many economists have warned of economic catastrophe if the United States does not raise the amount it is legally allowed to borrow by August 2.

Solomon, Strumpf, those CEOs, and our dear president are totally clueless.

First of all, per Elizabeth Foley, a law professor at Florida International University:

The “debt” that “shall not be questioned” under Section 4 [of the 14th Amendment] thus refers only to bonds and similar debt instruments. It does not include statutory “obligations” like Medicare, Social Security and other entitlements. These statutory obligations are not constitutionally protected in any way, and can be repealed, limited or otherwise altered by a simple majority vote of Congress.

[…] Section 4 does not grant the president dictatorial power to ignore the Congressionally established debt ceiling so that he can fund entitlements or other programs that he thinks Congress should fund.

In other words, not only can the president give top priority to interest payments on Treasury-issued securities, he is constitutionally required to do so — 14% of the Treasury’s $7 billion per day income-tax stream will cover it. Also, when a bond is cashed, the Treasury simply rolls it over, i.e., sells a new bond to retire that one — two transactions that cancel each other’s debt impact.

The thing to keep in mind about Social Security and Medicare is that both have incoming tax stream and trust funds of Treasury bonds that can be cashed whenever needed. So, there’s absolutely no excuse for missing any entitlement payments.

That said, it will cause economic turmoil when the government stops paying the rest of its bills, lays people off, and stops buying stuff. But, that what you get when you put people who hate “big government” in charge of a big government. They are all out to “starve the beast,” and that includes Obama, the architect of the Sequester. (more…)

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