The Fake Threat: Government Default

The Fake Threat: Government Default

The head of the International Monetary Fund has warned that a default on the debt of the United States government would create an international economic crisis. The Secretary of the Treasury says the same.

Indeed, the entire establishment of international debt warns that the ever-growing debt of the U.S. government is central to the prosperity of the world. This debt not only cannot be paid off, it must not be paid off. Without this endless expansion of government debt, these highly paid experts assure us, the world will fall back into recession. Clinton was praised because he balanced the budget, sort of, by counting rising Social Security debt as income. But those days of praise are over. Today, we are told, the United States government must absorb the thrift of the world, or at least absorb the expansion of counterfeit money by the world’s central banks.

A Reuters story in the Australian newspaper sounds the alarm.

Top officials of US and international financial institutions ramped up warnings overnight that failure to raise the US debt ceiling to prevent the world’s largest economy from defaulting would deal a serious blow worldwide.

The warnings from the US Treasury, the head of the International Monetary Fund and central bankers at home and abroad amounted to a shot across the bow of lawmakers on Capitol Hill whose failure to agree on a funding bill has already led to a partial shutdown of the US government. The Secretary of the Treasury warns of dire consequences if the House does not raise the debt ceiling. The nation will fall into recession. The US government spends a lot more than it takes in, so not raising the debt limit would leave it unable to pay all its bills, which range from pensions for the elderly to interest on money borrowed from China.

Take a look at how the U.S. government spends money. Notice the percentage spent on paying interest. It’s 6%.

In short, debt maintenance is peripheral in the budget. The federal government can keep paying its bills by cutting defense spending and discretionary spending a few percentage points.

The threat of default is a fake threat. It’s a Halloween goblin to scare moderate House Republicans. The government can and will continue to pay interest to the world’s central banks, including the Federal Reserve.