The United States does not have to default on its debt, and the Social Security and Medicare checks can go out even if Republicans and President Obama cannot strike a deal to raise the debt ceiling by August 2.
Even though the government cannot borrow additional money, it still has tax revenues equal to about 55 percent of expenses—$2.2 trillion against expenses equal to about $3.8 trillion for a $1.6 trillion deficit.
With those tax revenues, Washington can fund interest on the national debt, Social Security, Medicaid, and crucial national defense responsibilities. With the interest on the debt honored, the government can sell new bonds to replace bonds that come due without piercing the statutory debt limit.
Interest, benefits to seniors and defense would absorb virtually all tax revenues. It would appear the other functions of government would have to shut down, but the Administration has other options.
Often overlooked, the Treasury can print money to pay its bills. Before you gasp that Washington would be flooding the world with greenbacks—it doesn’t have to be.
The Federal Reserve holds on its balance sheet about $2.6 trillion in securities, mostly Treasury bonds, which it could sell to absorb the money the Treasury prints to pay its bills. At $1.6 trillion a year, that could keep the government running past the next election.
Also, since 2007, government spending has jumped $1.1 trillion, but only $200 billion was needed to cover inflation—the $900 billion additional was new programs and benefits and higher pay. That has increased federal spending’s share of GDP from 19.6 percent to more than 25 percent.
Temporarily, slicing that additional government spending by $450 billion, by executive order, would likely stand up in court as an emergency measure. Especially if President Obama and Secretary Boehner sat down and did a deal, alone and with no help from their partisan friends but if necessary.