Rush Limbaugh has falsely suggested that there would be no adverse consequences for failing to raise the federal government's debt ceiling, claiming that because the government takes in enough revenue to pay interest on the debt, there is no danger of default. But experts say that if the government failed to pay many of its other bills, it would create economic chaos and could result in rising interest rates.
Limbaugh Says "There Is No Crisis" Because U.S. Can Afford To Pay Interest On Debt
Limbaugh: "We Do Not Need To Raise The Debt Ceiling. There Is No Crisis." From the June 29 edition of Rush Limbaugh's radio show:
LIMBAUGH: TheHill.com has an interesting story today that sort of sets the stage for what's to happen. Headline: "Report: Treasury must cut spending 44 percent in default." "New analysis by the Bipartisan Policy Center, which has been shared extensively with members of Congress, estimates that the Treasury Department would not be able to pay all its bills and would need to implement an immediate 44 percent cut in federal spending in the event the debt ceiling is exceeded."
So if we don't - I'll tell you what this is. You know when your local community -- state, town -- starts telling you about cuts, what do they do? They tell you they're going to have to cut teachers, and then they tell you they're going to have to cut firemen, and then they tell you they're going to have to cut cops. And what do you do? "Oh, no, no, no. I don't want my kids [unintelligible]. I don't want to -- no, no, no, don't cut the teachers, don't cut the cops, don't cut the --" "Well, OK, you don't want the cuts? Then fine, don't cut anything." Same thing's being set up here. Same exact thing.
Treasury Department, not able to pay all its bills, would need to implement an immediate 44 percent cut in federal spending in the event the debt ceiling is exceeded. Fine, do it.
"On an annualized basis, the cut in spending alone is a 10 percent cut in GDP. ... The report released Tuesday concludes that Treasury would not be able to pay all its bills between August 2 and 'probably' not later than August 9 if the debt ceiling is not increased. 'Handling all payments for important and popular programs' including entitlements and military pay will 'quickly become impossible.' "
See how this is being set up? If we don't raise the debt ceiling, military people don't get paid. Oh. Can't have that.
" 'Handling all payments for important and popular programs' including entitlements and military pay will 'quickly become impossible.' " No Social Security, no Medicaid. I mean, if we don't exceed the debt limit, I mean, it's -- guess what? All the Republicans' fault. The Republicans are sabotaging -- they want all this to happen so as to somehow help them at the ballot box in November.
Truth is, we would only default if we don't service our debt. The cost of servicing the debt is 6 percent of the budget, and we have revenue coming in to do that. We do not need to raise the debt ceiling. There is no crisis. There is no Armageddon. This is stimulus all over again. This is TARP all over again. This is the same lie repeated over and over again. The same attempt to make you think your country is coming to screeching halt and is ending unless the debt ceiling is raised. [Premiere Radio Networks, The Rush Limbaugh Show, 6/29/11]
Limbaugh: "We Don't Need To Raise The Debt Limit To Cover The Debt Service." From Limbaugh's radio show:
LIMBAUGH: No one is saying we should default on our debt. What I'm saying is we won't. We can't. We literally can't. It's not that we -- "Oh my god, we can't let that happen" -- it's not that -- we can't. We couldn't if we wanted to. Well, we could if we wanted to if we just stopped accepting payments, which is what we would have to do. We cannot default, and there's no reason to default. It's a scare tactic.
With the number of bonds that the Treasury has issued, it costs the government about $20 billion every month to service this debt. But the government actually takes in about $200 billion every month, minimum. So we easily have enough to cover the debt service of these bonds. In fact, we could easily cover debt service even if the debt limit was slashed instead of raised. We don't need to raise the debt limit to cover the debt service, and he's banking on you not knowing that. [Premiere Radio Networks, The Rush Limbaugh Show, 7/7/11]
Limbaugh: "All We Have To Do Is Reaffirm That We Will Continue Making Interest And Maturity Payments On Bonds As They Come Due." From Limbaugh's radio show:
LIMBAUGH: The problem Obama has is that he spends and wants to spend over $300 billion a month, which is a spending problem, my friends. It's not a debt-servicing problem. We don't have a debt-servicing problem. We don't have a default problem. Ain't possible. Isn't going to happen. We can't.
Now, the sad thing here is that Obama knows this. So he is intentionally confusing the public that every dollar government spends is the same as every other dollar. Meaning, he wants you to think that there's no difference between paying bondholders who lent the government money on the solemn promise of repayment backed by the full faith and credit of the U.S. -- in other words, the bond buyers. People go out and buy the T-bill. Long bond, short bond, whatever bond they buy.
Obama is trying to confuse the public that every dollar that government spends is the same as every other dollar. There's no difference between -- he wants you to think there's no difference between paying the bondholders, servicing the debt, and paying, say, investments in these absurd green jobs initiatives that he wants to slide to his pals over at GE. Well, he's telling the public that if we don't pay the latter, if we don't continue to make these investments, that we will be defaulting on our debt every bit as much as if we stuff our bondholders -- or stiff our bondholders, which is a misrepresentation at its charitable best.
In fact, Geithner, little Timmy, says that he can't -- which means he won't -- distinguish between the first kind of payment and the second, because once the government commits to some kind of spending, he claims there's no difference. That's insane.
To avoid default, all we have to do is reaffirm that we will continue making interest and maturity payments on bonds as they come due. That's all we have to do. It has nothing to do with a Social Security check. It has nothing to do with Medicare services. It has nothing to do with any of these stupid education investments. Zilch, zero, nada. To avoid default, all we have to do is to keep making interest and maturity payments on the bonds as they come due. The rest ought to be Obama's political problem, not ours. We're the ones that want to live within our means. He's the one who wants to spend 300-plus billion dollars a month when we've only got 180 billion coming in, after we make the $20 billion payment and service the debt. That's not a default issue. That's a scare tactic. There is no default. [Premiere Radio Networks, The Rush Limbaugh Show, 7/7/11]
Limbaugh: "We Are In No Risk Of Being Unable To Pay Our Bills." From Limbaugh's radio show:
LIMBAUGH: But behind the scenes -- here's the next paragraph -- "Behind the scenes, top Treasury officials have been exploring ways to prevent a financial meltdown that would be triggered if the government were unable to pay its bills on time." But we are in no risk of being unable to pay our bills. "Treasury has studied the following issues: whether the administration can delay payments to try to manage cash flows after August 2" -- which it can. Government does it all the time, such as in the case of so-called government shutdowns. They do it all the time. [Premiere Radio Networks, The Rush Limbaugh Show, 7/7/11]
Experts: Disruptions To Government Payments Would Debilitate Economy, Could Raise Interest Rates
Bipartisan Policy Center: Lack Of Debt Ceiling Deal Would Mean 44% Cut In Federal Spending, 10% Cut In GDP. From an article in The Hill:
New analysis by the Bipartisan Policy Center (BPC), which has been shared extensively with members of Congress, estimates that the Treasury Department would not be able to pay all its bills and would need to implement an immediate 44 percent cut in federal spending in the event the debt ceiling is exceeded.
On an annualized basis, the cut in spending alone is a 10 percent cut in GDP, BPC scholar Jay Powell told reporters.
In one scenario, if the administration tries to protect Social Security, Medicare, Medicaid, defense contracts and unemployment insurance, then no military pay, tax refunds, federal civilian pay or welfare payments could be made that month.
Protecting the social safety net, including Pell Grants and welfare, along with the big entitlement programs, still means that no federal workers would be paid in August and no tax refunds would be issued.
In both scenarios, the entire budgets of the Justice, Labor, Energy, Interior, Health and Human Services and Commerce departments are zeroed out, as are the budgets of NASA, Environmental Protection Agency, Federal Transit Administration and Federal Highway Administration.
The BPC does not see it likely there will be an actual default on bond payments. BPC head Jason Grumet said this is because the relative harm of an actual bond default is the greater evil, so it is less likely than the massive cut in spending.
Grumet said the study shows there is no scenario where only Washington is punished -- it's the American people who are punished. [The Hill, 6/28/11]
S&P Official: Cutting Government Payments "Would Have A Very Sharp, Negative Fiscal Impulse To The Economy." From a Bloomberg Television interview with John Chambers, managing director of sovereign ratings at Standard & Poor's:
ERIK SCHATZKER (host): John, one of the open questions for the Treasury Department is whether or not it would be legally possible for the United States to prioritize debt payments so that interest and principal on Treasuries remain current while the government curtailed spending on other programs.
CHAMBERS: I think that they can prioritize payments, however -- and that, of course, would not engender a default by our definition. However, you would have to contract your payments in a massive way overnight, and that would have a very sharp negative fiscal impulse to the economy, and that would be disruptive. [Bloomberg Television, 6/30/11]
Fitch Ratings: Failure To Pay Bills "Would Damage Perceptions Of US Sovereign Creditworthiness." From a report by the global rating agency Fitch Ratings:
Fitch would only recognise a sovereign default event if there was failure to honour on due date interest and/or principal payments due on US Treasury securities. Widespread and prolonged delay to suppliers of goods and services, including salary payments to federal employees, would damage perceptions of US sovereign creditworthiness but would not in itself constitute an event of default from Fitch's sovereign rating perspective. In contrast to many other sovereign borrowers, debt service is not accorded priority over other financial obligations of the US government. Nonetheless, even if the Treasury were able to overcome any legal and operational obstacles to the prioritisation of debt service and other obligations essential to the integrity of the state, such as those related to defence and national security, extensive payment delays on other obligations would confirm that the US government was in severe financial distress and that a failure to make payments on rated Treasury securities (bills, notes and bonds) was potentially imminent. If it had not already done so, in such circumstances Fitch would place its sovereign rating of the US on RWN [Rating Watch Negative]. [Fitch Ratings, "Thinking the Unthinkable -- What if the Debt Ceiling Was Not Increased and the US Defaulted?" 6/11, retrieved 7/8/11]
Former Comptroller General: "Who's Going To Ultimately Pay The Price? The Answer Is, The Taxpayers." Discussing "what actually happens" if the debt ceiling isn't raised, former U.S. Comptroller General David Walker said:
Well, first, the 14th Amendment to the U.S. Constitution protects bondholders, so people are going to be able to be -- honor their bonds. It'll also protect interest payments on those bonds. So the real question is, what's the Treasury secretary going to do to close a $4 billion-a-day gap between the revenues that are coming in and the expenditures that we have? And so that means the real question is, who's going to get paid, who's not going to get paid, and who's going to ultimately pay the price? The answer is, the taxpayers. Because if you don't end up paying people on time, there's -- you're going to have to pay penalties and interest on the Prompt Payment Act. If you lay off people, historically the president and Congress has retroactively paid people once the crisis has passed. And the real question is, what's it going to do to interest rates? Because for every 1 percent increase in interest rates, 100 basis points, it's 150 bucks -- 150 billion bucks a year. That's real money.
So you've got to decide what are you going to do to close a $4 billion-a-day gap, including weekends? By the way, our revenues are so low this year and our mandatory spending is so high, we're 2 billion bucks a week short of being able to even pay mandatory spending. Two billion a week short on that. So you could eliminate all discretionary spending -- national defense, homeland security, education, transportation, State Department, Congress, the White House -- you could eliminate all of that. We're still 2 billion a week short.
Well, first, we don't want to wait until the last minute to do a debt-ceiling deal. This is not like the recent debate over funding for fiscal 2011. We really don't know what would happen, and we don't really want to take a chance. We do know that back in the '70s, there was a period of time when the U.S. didn't pay, I think, $100 to $200 million worth of its payments on time during the oil crisis, and it actually caused interest rates to go up about 60 basis points, 0.6 of 1 percent. Sixty basis points on our debt is about $90 billion a year. And what do you get for that 90 billion bucks? Nothing.
You also have to be concerned about the stock market as well, properly. What would happen with the stock market? Look, we're the largest economy on earth, the world's sole superpower, 60 percent-plus of global reserve currency. We cannot afford to take a risk. [ABCNews.com, Topline, 7/7/11]
UBS: Failure To Raise Debt Ceiling May Bring "Sharp Increase In Interest Rates," Would Keep U.S. From Paying Interest On Mature T-Bills. From a Financial Times blog post on a memo on the debt ceiling from banking firm UBS:
It first goes into some political reasons why brinkmanship could lead to disaster. GOP congressmen are keen to avoid a repeat of the government shutdown debacle, where $38bn of cuts somehow became $352m. And they can just about claim the public is on their side -- 47 per cent of voters oppose a debt ceiling raise, according to Gallup. Social security payments will also have been made by August, limiting the annoyance of the constituency most likely to vote.
Then it comes to those overly sanguine assumptions about interest payments:
The mistaken view that interest payments to US Treasury-holders could easily be prioritized, avoiding default indefinitely. This view requires that investors willingly roll over their holdings of Treasury debt and does not take into account the sharp increase in interest rates that may result.
And here comes the important reminder: it's one thing to pay interest payments but it's another to ask holders of the T-bill of doom and other bonds to rollover.
If the debt limit debate goes unresolved beyond Aug. 4, the US Treasury would need to roll over maturing Treasury bills but would be unable to pay the interest on those that have matured (see chart, p. 1). Investors are unlikely to remain willing to roll over their holdings of Treasury debt indefinitely under these conditions. The liquidity event would not be limited to the Treasury market. Some holders of Treasury bills who required these funds near the maturity date could face significant cash pressures if expected payments do not materialize. These borrowers could be forced to borrow funds in upset credit markets.
[FT Alphaville, 6/22/11]