While the United States will not default on its debt, the current debate surrounding the debt ceiling and how the United States will position itself to live within its means is critically important. For the foreseeable future, the United States will need to continue to add debt to its already bloated balance sheet if it wants to meet all of its obligations in the ordinary course. To fix this unsustainable addiction and need for debt, leaders with tremendous political will need to step up and make prudent economic decisions.
So, why won’t the United States default on its public debt if the debt ceiling is not raised (again)?
The United States has many monetary obligations. One of those obligations is to make interest payments on its outstanding public debt. Other obligations relate to defense spending, social security, education and public employees. The United States does not have the funds to pay all of its obligations, but it has more than enough money to make its current interest payments on its public debt.
The total receipts of the federal government for the fiscal year are approximately $1.5 trillion. The total amount of interest owed for the first 8 months of fiscal year 2011 was approximately $275 billion. Consequently, the federal government’s receipts are sufficient to make the interest payments on the public debt. However, the budget deficit for the first 8 months of fiscal year 2011 was approximately $929 billion. So, if the debt ceiling is not raised, thereby precluding the United States from incurring more debt, it will not have the receipts to cover all of its obligations and need to decide which obligations to extend (i.e., “stretch” or leave unpaid for a time) and which to pay.
While the United States may need to struggle with determining which obligations to meet until the debt ceiling is raised and this dilemma sounds alarm bells, we’ve seen it before in smaller settings. For instance, in 2009, California gave tax payers IOUs rather than tax refunds. In the corporate setting, when a company runs into a financial problem, it will sometimes “stretch” its payables to preserve its liquidity. If the company has a pure liquidity problem — and not a debt problem — simply buying time may allow the company to work its way through its financial problems without the need for any restructuring of its balance sheet. However, if the company also has a debt problem, the time it has bought will not allow it to slip through unscathed, but rather the company will need to restructure its balance sheet.
The United States has a debt problem which was caused by the debilitating combination of excessive public debt and staggering unfunded liabilities, both of which continue to grow. The amounts are astounding and attempting to come up with a plan for fixing this problem is daunting.