David Friedman has a very good post on The Debt Limit and Default that makes two essential points for cutting through the hyperbole in the news about the risks of not raising the country’s debt limit. (1) Our government takes in enough revenues to make all interest payments on existing debt and (2) even defaulting on all of those interest payments would not be enough to deal with the budget deficit. Read the whole thing, it’s short.
Joe Nocera has an op-ed in the New York Times trotting out the parade of horribles that would occur if the Federal government did default on its interest payments, but never acknowledges that not raising the limit doesn’t automatically lead to default.
Matt Yglesias, writing at Slate, acknowledges that the Federal government could make all of the interest payments, but says it would be really hard and require the Treasury Department to figure out how to rework its computer systems to do it.
Both authors uncritically repeat a widely believed falsehood about United States debt. Nocera: “The second point worth making is that U.S. government debt is the only risk-free asset in the world.” Yglesias (on impact of payment prioritization): “But nobody in the future could seriously treat U.S. government debt as a risk-free information-insensitive asset.”
There are no risk-free investments.
I had to put the above in bold because it’s so basic and important. The real effect of not raising the debt limit is not default, but rather facing the reality that there’s nothing magical about the United States that lets it borrow money it doesn’t have indefinitely and without negative consequence. That truth hurts, but it’s time we faced it.