More on the Debt Ceiling

I believe that I can answer the question asked here by Greg Ip:

What this clearly means is that Treasury can easily remain current on existing debt, provided it is willing to suspend some non-interest outlays. Does it have the authority to do so? What is the relative seniority of creditors of the United States government? States often specify the relative seniority of their bondholders either in their constitution or statute; in California, for example, bond holders stand ahead of all creditors except schools. Illinois has remained current on its bond debt while racking up some $6 billion in unpaid bills to other creditors.

I have yet to find a similar ranking for the federal government.

The federal government can avoid default virtually indefinitely by delaying or reducing other “mandatory” outlays. Social Security payments, for example, can be reduced practically ad libitum by any number of bookkeeping changes. Or they can be delayed. They’re not an enforceable right.

That is not to say that a political price wouldn’t be paid for doing so. To my mind that’s the more interesting question: what strategy for avoiding default (in the unlikely event of a failure to raise the debt ceiling) would result in the lowest political cost to the Administration? To Democrats? To Republicans?

I think that raising the debt ceiling as the debt grows without constraints probably continues to present the least risk to all of the parties above while increasing the risk to the country. That’s why we’ve adopted that strategy all along.


Felix Salmon says much the same thing. However, I believe he’s in error here:

Some of those spending cuts could be implemented almost invisibly. For instance, Social Security runs a surplus for the time being; it invests that money in special non-marketable Treasury securities, which count as Treasury debt.

Didn’t Social Security go cashflow negative this year?

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