GO
Loading...

Will the US Be Downgraded?

Is a downgrade of the credit rating of the United States inevitable if no deal is reached on the debt ceiling by August 2nd?

I decided to ask Jason Fichtner, former Deputy Commissioner of Social Security ,Chief Economist and Associate Commissioner for Retirement Policy at the Social Security Administration. He is now a Senior Research Fellow at the Mercatus Center at George Mason University.

LL: Is the S&P being misquoted when it comes to a U.S. downgrade?

JF: Yes and No. Some of the quotes are being used out of context. And in some cases, it appears people are seeing what they want to see from the S&P and not what's actually been said in the reports. S&P says they will downgrade the U.S. debt if the U.S. government technically defaults. But this has been interpreted as S&P saying that if we do not raise the debt limit by the August 2nd “deadline,” we automatically default on our debt payments.

The U.S. government will collect roughly $2.2 trillion in tax revenue this fiscal year, which is more than enough to cover the estimated $200-$220 billion in annual interest payments. Thus, Treasury can easily avoid a technical default. (See below for legal analysis from GAO that Treasury has authority to prioritize payments.)

LL: Who is to blame for this misinformation?

JF: To be honest–some of the blame goes to politicians who have an incentive to fuel the fire of panic in order to try and get a deal done; some to members of the media who may not fully understand.

LL: Treasury can make the decision of which bills to pay. Let's break down their options?

JF: Yes. GAO has said that Treasury has the legal authority to prioritize payments.

See right at the top of this link.

Options are to prioritize paying interest on the debt first and foremost; augment cash flow with disinvestment of Civil Service Retirement and Disability Fund (see answer in question below); pay Social Security benefits out of payroll taxes and the $2.6 trillion in assets held in the Social Security Trust Funds—these bonds can be exchanged to pay benefits without adding to the gross debt.

LL: Bottom line is Secretary Geithner wrong in what the Treasury can do?

JF: I am extremely concerned that, by continuing to promote an arbitrary deadline as an actual ‘default’ date, Treasury Secretary Geithner is fueling the flames of panic.

Treasury has enough assets available to avoid default through the end of the fiscal year, possibly longer. Treasury has an arsenal of options to ensure key priorities,such as interest payments, are paid. And while none of the options is ideal, any is better than default.

Along with prioritizing payments and managing cash, the Treasury can sell assets, including gold and disinvest various government trust funds (such as the Civil Service Retirement and Disability Trust Fund) to augment cash flow to pay bills. There is currently roughly $700 billion in the CSRDF. This accounting maneuver was used back in 1985. See the following note from my report with Veronique de Rugy, “The Debt Ceiling: What is at Stake?”

“In September 1985, the Treasury Department informed Congress that it had reached the statutory debt limit…Treasury took the additional step of “disinvesting” the Civil Service Retirement and Disability Trust Fund, the Social Security Trust Funds, and several smaller trust funds by redeeming some trust fund securities earlier than usual. Premature redemption of these securities created room under the debt ceiling for Treasury to borrow sufficient cash from the public to pay other obligations, including November Social Security benefits…As a result of the 1985 debt limit crisis, Congress subsequently authorized the Treasury to alter its normal investment and redemption procedures for certain trust funds during a debt limit crisis. Such authority was not provided with respect to the Social Security trust funds…In 1996, Congress passed P.L. 104-121 to increase the debt limit and, among other provisions, to codify Congress’s understanding that the Secretary of the Treasury and other federal officials are not authorized to use Social Security and Medicare funds for debt management purposes, except when necessary to provide for the payment of benefits or administrative expenses of the programs.” Mindy Leavitt et al., Reaching the Debt Limit: Background and Potential Effects on Government Operations, (Washington DC: Congressional Research Service, February 11, 2011), 4–5,.

A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."

_____________________________________________

Questions? Comments? Email us atNetNet@cnbc.com

Follow on Twitter @ twitter.com/loriannlarocco

Follow NetNet on Twitter @ twitter.com/CNBCnetnet

Facebook us @ www.facebook.com/NetNetCNBC

Featured

NetNet TV

Wall Street