I am writing in response to your letter of May 23, 2011, regarding the statutory debt limit. . . . . . .
The debate over the debt limit can seem esoteric, but a failure to resolve it in the near term would have painful implications for people in every walk of American life. It would have a serious impact on members of the Armed Forces who depend on paychecks to feed and house their families. Social Security recipients who subsist on their monthly benefits, veterans who rely on the government for their retirement and health care needs, and small business owners or employees who provide goods and services to the country.
In your letter, you suggest that the debt limit should not be raised, and instead the federal debt be “capped” at the current limit. You further propose that after the government’s borrowing authority is exhausted in August, the United States should for some indefinite period pay only the interest on its debt, while stopping or delaying payment of a broad swath of other commitments the country has made under the law. . . . . . . .
Even if the idea of “prioritization” were not so unwise, it would not be a mere exercise in “belt tightening,” as you suggest. The United States in now required to borrow approximately 40 cents for every dollar of expenditures. Your proposal would require cutting roughly 40 percent of all government payments. These deep cuts would be felt by all Americans, and they would risk throwing the economy back into recession.
Note his remark above, “The United States in now required to borrow approximately 40 cents for every dollar of expenditures,” kind of took me by surprise. Considering the present size of the deficit, it doesn't look as if it is a temporary thing.
Geithner goes on to state:
Under normal circumstances, investors who hold Treasuries purchase new Treasury securities when the debt matures, permitting the United States to pay the principal on this maturing debt. Yet in the scenario you advocate, in which the United State would be defaulting on a broad range of its other obligations, there is no guarantee that investors would continue to re-invest in new Treasury securities . . . . . . . . failure to pay non-debt obligations “would signal sever financial distress and potentially imminent debt default,” prompting the U.S. sovereign rating to be place on “Rating Watch Negative.”The last two paragraphs seem to run contrary to supply and demand economics. A rise in T-bill rates would bring investors back. Presently, why are Treasury rates so low? Doesn't the risk of default imply higher rates? Credit card companies charge deadbeats around 30 percent.
If investors chose not to purchase a sufficient volume of new Treasury securities, the United States would be required to pay the principal on maturing debt, and not merely the interest, out of available cash. Yet the Treasury would be unable to make these principal payments without the continued confidence of market participants willing to buy new Treasury securities. Your proposal assumes markets would be unconcerned by our failure to pay other obligations. But if this assumption proved incorrect, then the United States would be forced to default on its debt.
How does raising the debt limit solve the threat of government default? It's nothing more than an accounting trick. A possible real solution, tax every man, woman and child in this country, an additional $1,000 per year (or deduct it from benefits received); this approach might eliminate the need to raise the National Debt level. And that’s not likely to happen.
This financial game being played in Congress is defined by rules, and as long as they play by the rules, the game can continue. In reality, the country is broke and the only thing keeping the government from defaulting is the extremely low interest rate on the National Debt. Our government is running on IOU’s. The 14 trillion in debt isn’t real; it’s too big to be real. True reality is that government check in your mailbox. Who gets the blame when the house of cards collapses? Naturally the Republicans, Obama gave them ample warning, raise the debt limit or else.
So today’s assignment kiddies, is to write down your net worth on a piece of paper. Now move the decimal point one place to the left. This is how you raise the national debt. The new figure is your equivalent buying power in todays dollars, at retirement. You didn’t lose a penny, but that’s how our daily newspaper went from a dime to a dollar.