Salmon: Government will breach debt ceiling even if no deal is reached

Rick Moran
A little food for thought from Felix Salmon on why the government will go over the debt ceiling regardless of what happens on The Hill.

Samuel Beckett's famous phrase "You must go on, I can't go on, I'll go on" is a pretty good summation of what will face Treasury come August 3 if there's no deal on the debt limit. Reuters has a fantastic story this evening on the impossible quandary facing Treasury officials should the unthinkable come to pass; purely as a practical matter, it's far from clear that it's even possible to stop making the 3 million payments that Treasury makes automatically every day. Doing so involves a massive computer-reprogramming effort which I'm sure could not be implemented overnight - and for political reasons nobody is going to get started on such an effort until after all hope is lost for a deal in Congress.

Realistically, then, the government is likely to breach the current debt ceiling no matter what Congress agrees. A failure to lift it would be a bit like an edict to a steaming supertanker that it had to stop dead: no matter how much force of law that edict has, sheer momentum is going force many basic operations of the public fisc to continue for some period of days or weeks.

At that point - and no earlier - there would be enormous pressure on the White House to pull out the 14th Amendment and declare the debt ceiling unconstitutional, if only for practical reasons: doing so would be a lot easier than trying to reprogram the computers which are set to send out $49 billion of Social Security checks on August 3. Not to mention that no president ever wants to be the person who stiffed America's seniors on their guaranteed monthly income: a greater failure of leadership can hardly be imagined. On the other hand, saying "enough of you bickering legislators, I'm sworn to uphold the Constitution and do what's in the best interest of the country" is much more presidential.

Salmon believes that the August 2 deadline is for real. But the markets - so far - seem to believe that there will be a deal:

The August 2 deadline is real, and no responsible legislator would risk letting it pass. Beyond that date is uncharted territory: Here Be Dragons stuff. Real uncertainty, as opposed to risk: anything could happen, including some extremely catastrophic outcomes related to payment default on maturing Treasury securities.

For the time being, the markets are buying it. The latest Treasury auction of four-week bills came in at 0.000% - Treasury is getting the money, literally, for free. And the maturity? August 4 - two days after the August 2 deadline. It's entirely possible that Treasury simply won't have the money to repay this principal. And yet that possibility clearly isn't priced in - partly because it can't be priced in, and partly because of auction dynamics: the bidders who won the auction are precisely the people who aren't worried about the debt ceiling.

Salmon is no alarmist, nor is he enamored of Obama, having opposed Obamacare and the size and scope of the stim bill. I realize it is fashionable in some conservative circles to dismiss the notion of catastrophe with regard to not raising the debt ceiling, but what if the point of view advanced by Salmon is right? Can we take that chance?

I liken the argument to the old SETI (Search for Extraterrestial Intelligence) debate over whether we should actively broadcast our presence to alien civilizations or wait in the weeds observing. The point made by those who want us to keep quiet is simple; if there is a hostile alien civilization out there - even if it is a very remote possibility - how can we take that chance when being wrong means the end of humanity?

Sometimes, even if the chances for catastrophe are small, common sense dictates we choose to avoid the possibility.




A little food for thought from Felix Salmon on why the government will go over the debt ceiling regardless of what happens on The Hill.

Samuel Beckett's famous phrase "You must go on, I can't go on, I'll go on" is a pretty good summation of what will face Treasury come August 3 if there's no deal on the debt limit. Reuters has a fantastic story this evening on the impossible quandary facing Treasury officials should the unthinkable come to pass; purely as a practical matter, it's far from clear that it's even possible to stop making the 3 million payments that Treasury makes automatically every day. Doing so involves a massive computer-reprogramming effort which I'm sure could not be implemented overnight - and for political reasons nobody is going to get started on such an effort until after all hope is lost for a deal in Congress.

Realistically, then, the government is likely to breach the current debt ceiling no matter what Congress agrees. A failure to lift it would be a bit like an edict to a steaming supertanker that it had to stop dead: no matter how much force of law that edict has, sheer momentum is going force many basic operations of the public fisc to continue for some period of days or weeks.

At that point - and no earlier - there would be enormous pressure on the White House to pull out the 14th Amendment and declare the debt ceiling unconstitutional, if only for practical reasons: doing so would be a lot easier than trying to reprogram the computers which are set to send out $49 billion of Social Security checks on August 3. Not to mention that no president ever wants to be the person who stiffed America's seniors on their guaranteed monthly income: a greater failure of leadership can hardly be imagined. On the other hand, saying "enough of you bickering legislators, I'm sworn to uphold the Constitution and do what's in the best interest of the country" is much more presidential.

Salmon believes that the August 2 deadline is for real. But the markets - so far - seem to believe that there will be a deal:

The August 2 deadline is real, and no responsible legislator would risk letting it pass. Beyond that date is uncharted territory: Here Be Dragons stuff. Real uncertainty, as opposed to risk: anything could happen, including some extremely catastrophic outcomes related to payment default on maturing Treasury securities.

For the time being, the markets are buying it. The latest Treasury auction of four-week bills came in at 0.000% - Treasury is getting the money, literally, for free. And the maturity? August 4 - two days after the August 2 deadline. It's entirely possible that Treasury simply won't have the money to repay this principal. And yet that possibility clearly isn't priced in - partly because it can't be priced in, and partly because of auction dynamics: the bidders who won the auction are precisely the people who aren't worried about the debt ceiling.

Salmon is no alarmist, nor is he enamored of Obama, having opposed Obamacare and the size and scope of the stim bill. I realize it is fashionable in some conservative circles to dismiss the notion of catastrophe with regard to not raising the debt ceiling, but what if the point of view advanced by Salmon is right? Can we take that chance?

I liken the argument to the old SETI (Search for Extraterrestial Intelligence) debate over whether we should actively broadcast our presence to alien civilizations or wait in the weeds observing. The point made by those who want us to keep quiet is simple; if there is a hostile alien civilization out there - even if it is a very remote possibility - how can we take that chance when being wrong means the end of humanity?

Sometimes, even if the chances for catastrophe are small, common sense dictates we choose to avoid the possibility.