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Default… But Not Really

The current “crisis” coming out of Washington has to do with default.  If the debt ceiling isn’t raised, America will default and not be able to pay her bills.  No more Social Security checks for Grandma, and no more food stamps for the hungry.  Police stations will shut down, and criminals will roam the streets.  Chaos will reign, and only smart government can save the day.


America actually hit her debt ceiling back on May 15th … and you may have noticed that the lights didn’t get cut off.  The Chinese are right – we are technically in default already – but no one is calling America bankrupt.  We’re still living merrily outside of our means, and since the consequences don’t seem to truly apply to us, it’s not clear when the situation will change.  Here’s a rundown of the real situation:

No New Debt, But Still Spending

If America is so darn broke, how are we still spending money?  After all, the threat out of Washington is that when we hit the debt ceiling, we’ll immediately start defaulting.  Unfortunately, the truth of the matter is that America has plenty of money, just not enough to support all the special interest spending that we do if we can’t issue new debt.

The way the debt ceiling reality works is that no new debt can be issued … but that doesn’t automatically mean America has to stop spending or even stop funding essential programs.  Tax revenues can be immediately applied to public programs, and the government collects more than $170 billion in taxes each month.  Instead of having cash on hand, the government just has to wait for its monthly “paycheck” to come in, courtesy of the American public.

Accounting Tricks & Pickpocketing

Another way that the government can continue to operate with a debt ceiling limit in place is by using accounting tricks and pickpocketing to make ends meet.  Accounting tricks can help “balance” the books by doing things like leaving special program expenses out or counting some liabilities as assets (at least in the eyes of non-governmental accountants).  The other way to keep things humming along is by pickpocketing.

The pickpocketing is already underway and has been since May 16th.  Treasury Secretary Geithner agreed that no new debt was going to be issued between May 16th and August 2nd, our big debt ceiling deadline, but that restriction has hardly tied his hands.  Instead, he has found plenty of money for the government to spend in the Civil Service Retirement and Disability Funds and the G Fund of the Thrift Savings Plan.  Officially the monies in these funds are retirement and pension dollars for civil service employees, but they are now what’s helping the government keep on with business as usual for another couple of months.  Even with no changes to current spending levels, the money in these funds would support the US government for another six to eight months.

A Day Of Reckoning … Someday

Of course, fancy accounting tricks and looting retirement funds won’t be able to continue forever.  There will be a day of financial reckoning … someday … or maybe not.  After all, Bernanke can also print more money, or the government could cut back on the amount of money it spends on special programs and military equipment purchases.  This doesn’t mean Grandma will go hungry or that soldiers won’t have bullets, like the politicians want you to believe.  Instead, it means that we won’t be able to give foreign aid to Bahrain and Libya like we did last year, and expensive drone programs may not get funded by Uncle Sam.

In facing up to a debt ceiling, all the government is really dealing with is notice that its allowance isn’t as big as it wants.  America doesn’t have to go into default at all – the country just has to quit allowing government spending on things that don’t really provide benefits or that continue our indebtedness to other nations.  Without being able to create new debt under a debt ceiling rule, there is plenty of money for both Social Security and our existing debt payments, but not enough money for Social Security, debt payments, and special earmarks from senators or foreign aid to our ideological enemies.

At the end of the day, the debt ceiling showdown isn’t about America being broke or teetering on the edge of insolvency.  It’s about the end of the freewheeling fun times for pet projects and government excess.  Doomsday scenarios being circulated by the politicians exist to serve their own ends – America only defaults if they can’t give up their earmarks, pork, and special interest mandates.

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