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The bolded paragraph answers the question
10-11-2013, 07:23 AM #1
Below Average Genius Member
Posts:2,472 Threads:233 Joined:Apr 2013
The question is will the government pay the interest on the debt first or not if the debt ceiling isn't raised October 17th? The bolded paragraph down below reveals the answer.

By Caroline Baum

How is it government officials come to contradictory conclusions about what the U.S. Treasury can do in the event it lacks the money to pay all its bills? Can the Treasury prioritize and pay bondholders before everyone else?

The Treasury says no. The Government Accountability Office says yes. Who's right?

Both, unfortunately. The Congressional Research Service explained the source of the controversy in a Sept. 19 report titled "Reaching the Debt Limit: Background and Potential Effects on Government Operations." Absent any specific statutory authority, the GAO concluded that a decision on prioritization is up to the Treasury, which says the same lack of legal authority prevents it from prioritizing payments. In other words, the disagreement is really over "two different interpretations of silence in statute," according to the report.

If push comes to shove — if Congress fails to pass a short-term extension of the debt limit later this month — most policy analysts say the Treasury would side with the GAO's interpretation.

"Even though Treasury says it has no authority to prioritize bondholders over others, we believe it most certainly will," Andy Laperriere and Robert Perli of Cornerstone Macro LP wrote in an Oct. 7 research note.

And here's Moody's Investors Service: "We believe the government would continue to pay interest and principal on its debt even in the event that the debt limit is not raised, leaving its creditworthiness intact."

Mindful Evasion

Treasury Secretary Jack Lew surely can apply reverse reasoning: Not paying bondholders would mean a loss of creditworthiness, something no one in his position would precipitate voluntarily.

Does that mean the Treasury isn't telling the truth about its options? Not exactly. Anyone who watched Lew on last Sunday's talk shows understands that evading the question isn't the same as lying.

And who can blame him? Why advertise the Treasury's intention to pay bondholders first when it would mean AARP members, walkers and all, staked out on Pennsylvania Avenue with television crews in tow?

Now that we understand the source of the disagreement, let's look at the calendar and fact-check the Treasury's claim that it is at the mercy of its automated payments system and will have no choice but to default if Congress fails to raise the debt ceiling. In an Oct. 1 letter to Congress, Lew said the Treasury will have exhausted its extraordinary measures, which allow it to keep borrowing, by Oct. 17. The Treasury expects to have $30 billion in cash on hand at that time.

Interest payments on Treasury notes and bonds are due on the 15th and the final day of the month. The next interest payment, following the Oct. 17 drop-dead date, is due Oct. 31 in the amount of $5.9 billion. There is more than enough tax revenue coming in every month to cover interest payments. Maturing debt can be rolled over without any impact on the debt limit.

When it comes to the Treasury's payment system, debt and nondebt are handled separately. Sovereign-debt payments are distributed via Fedwire, the Fed's electronic funds-transfer system. Other payments and collections are handled by the Treasury's Financial Management Service. Segregation of the two types of payments makes it even harder to understand the Treasury's claim that it can't flip the switch and shut off nondebt payments.

House Republicans passed a measure authorizing the Treasury to use tax receipts to make interest and Social Security payments if the debt ceiling is breached, but the bill is going nowhere in the Senate.

Lifetime Scar

I am not suggesting that prioritizing payments would be simple or popular. Households and businesses do it all the time — without any specific statutory authority, I might add. When times are tough, a family may opt to make the monthly mortgage payment and forgo paying credit-card interest because the consequences of home-loan delinquency are far greater.

The same holds true for the federal government. Debt default is a scar the United States would bear for life. With $11.9 trillion of publicly held debt, about half of which is held by foreigners, the United States can't afford to instill doubt in the minds of bondholders. The Treasury was late in redeeming T-bills in 1979, and rates shot up by 60 basis points even though the delay was a result of a back-office glitch.

"It was small. It was unintentional. But it was indeed a default," the Urban Institute's Donald Marron wrote.

If you still think the Treasury is going to look the other way and let the computer system pay bills in the order in which they are due, think about this.

"Treasury debt is the currency on which the U.S. financial system is based," said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, N.J.

Treasurys serve as collateral for hundreds of billions of dollars of repurchase agreements between financial institutions each day. They are a key component of bank balance sheets, are widely held by money-market mutual funds and make up more than half the Federal Reserve's assets. The dollar is the world's reserve currency. If the full faith and credit of the U.S. government is suspect or in any way compromised, the system collapses.

Your move, Mr. Secretary.

Caroline Baum, author of "Just What I Said," is a Bloomberg View columnist.
© Copyright 2013 Bloomberg News. All rights reserved.

The Federal Reserve is the world's greatest power. They will NOT be denied. So when Obama says we won't be able to pay the interest on our debt if the debt ceiling isn't raised, he is full of sh!t and he knows it. The interest on the debt WILL be paid.

Pray for me. hug.gif

10-11-2013, 09:35 AM #2
JayRodney ⓐⓛⓘⓔⓝ
Posts:30,309 Threads:1,477 Joined:Feb 2011
Feds Collect $56 Billion in Taxes in 9 Days of 'Shutdown' - See more at: http://www.cnsnews.com/mrctv-blog/terenc...xBA8C.dpuf

And they need to borrow more money? wtf2.gif Just live and govern within your means or throw in the towel.
This debt is unsustainable.




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