Roll Over Beethoven

There's going to be a lot of reelin' and a-rockin' in Washington as we move up to the debt ceiling deadline, a lot of loud sounds pumping out from those stately buildings - the White House, the Treasury, the Federal Reserve - in a cacophony of misinformation, misdirection, distraction and...well, let's not be nasty.

The key claim of the administration as we move up to the debt ceiling deadline is that Congress has a responsibility to maintain the good faith of the debt of the federal government.   The administration will say that should Congress not raise the debt ceiling, that will have a catastrophic effect on federal debt, the standing of the United States, and on the world economy.

Which would be a pretty compelling argument if it were true.  But it isn't.  Except for those very rare years when the federal government runs a surplus, the United States, like virtually every country in history, does not repay its debt.  But if it doesn't repay its debt, what does it due when debt instruments - 1-month, 3-month, 1-year, 5- year, 10-year, 30-year - mature?

It rolls them over.  That's why they need Chuck Berry in Washington.  Rolling over means that you sell an equivalent new amount of the debt that you are redeeming.  That does not add to total debt outstanding - the debt ceiling - it simply replaces old debt with new debt in the same amount.

What Washington does need to do is to pay the interest on the debt.  That requires cash flow.  But the Treasury has plenty of cash flow.  It is collecting about $2.5 trillion in taxes a year and that will go up this year.  The budget problem is that it is spending about $3.6 trillion a year.  However, due to the extraordinarily low interest rates currently, interest payments by the federal government are only about $0.2 trillion, or about 9% of receipts and only about 6% of expenditures.  So interest payments are easily manageable even if the federal government is not selling any additional debt.  Again, to emphasize, under a fixed debt ceiling, the federal government can sell debt in the amount it is redeeming to make the debt outstanding good, just not any additional debt.

There is no free lunch here.  Since the government is borrowing about 30% of every dollar it spends, if it can't borrow additional funds, its spending has to be cut back drastically.  That is a crisis of sorts, although payments can be extended, purchases delayed, etc.

But the key thing in terms of the integrity of U.S. federal debt as we come up to the debt ceiling deadline, and the ululating and the moaning and the shrieking starts emanating from Washington, is that there is no debt crisis - a spending crisis maybe, but no debt crisis.  Don't let the noise machine get you down.  Just put on a little Chuck Berry and turn up the volume.   

There's going to be a lot of reelin' and a-rockin' in Washington as we move up to the debt ceiling deadline, a lot of loud sounds pumping out from those stately buildings - the White House, the Treasury, the Federal Reserve - in a cacophony of misinformation, misdirection, distraction and...well, let's not be nasty.

The key claim of the administration as we move up to the debt ceiling deadline is that Congress has a responsibility to maintain the good faith of the debt of the federal government.   The administration will say that should Congress not raise the debt ceiling, that will have a catastrophic effect on federal debt, the standing of the United States, and on the world economy.

Which would be a pretty compelling argument if it were true.  But it isn't.  Except for those very rare years when the federal government runs a surplus, the United States, like virtually every country in history, does not repay its debt.  But if it doesn't repay its debt, what does it due when debt instruments - 1-month, 3-month, 1-year, 5- year, 10-year, 30-year - mature?

It rolls them over.  That's why they need Chuck Berry in Washington.  Rolling over means that you sell an equivalent new amount of the debt that you are redeeming.  That does not add to total debt outstanding - the debt ceiling - it simply replaces old debt with new debt in the same amount.

What Washington does need to do is to pay the interest on the debt.  That requires cash flow.  But the Treasury has plenty of cash flow.  It is collecting about $2.5 trillion in taxes a year and that will go up this year.  The budget problem is that it is spending about $3.6 trillion a year.  However, due to the extraordinarily low interest rates currently, interest payments by the federal government are only about $0.2 trillion, or about 9% of receipts and only about 6% of expenditures.  So interest payments are easily manageable even if the federal government is not selling any additional debt.  Again, to emphasize, under a fixed debt ceiling, the federal government can sell debt in the amount it is redeeming to make the debt outstanding good, just not any additional debt.

There is no free lunch here.  Since the government is borrowing about 30% of every dollar it spends, if it can't borrow additional funds, its spending has to be cut back drastically.  That is a crisis of sorts, although payments can be extended, purchases delayed, etc.

But the key thing in terms of the integrity of U.S. federal debt as we come up to the debt ceiling deadline, and the ululating and the moaning and the shrieking starts emanating from Washington, is that there is no debt crisis - a spending crisis maybe, but no debt crisis.  Don't let the noise machine get you down.  Just put on a little Chuck Berry and turn up the volume.   

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