A Federal Default Invites Catastrophe
The government could fall $5.5 trillion behind by the end of the year.
By Tony James
October 9, 2013, 8:13 p.m. ET
I have always been amazed that anyone would choose to play Russian roulette. Who could ever be so bored, so irresponsible, or have such low future aspirations that they would flirt willfully with death while having nothing to gain?
Yet Congress is doing just that with the debt ceiling. Except there won't be just one victim. Every American will suffer.
Oct. 17 is just a guess of when the government runs out of cash. Look at Treasury's daily cash balance. It can swing by $50 billion a day. Can we be so sure we won't trip into the abyss sooner? Won't government suppliers and creditors, wherever possible, rush in to seek payment early, severely increasing the risk of a miscalculation?
If we do hit the debt ceiling, it is possible, even likely, that the government will eke out some additional cash. By selling some assets or by prioritizing some payments, it could muddle through very briefly.
But none of this is certain. If nothing is done, the Treasury will be short about $106 billion by Nov. 15, excluding debt maturities. Something has to give. There is a suggestion that the Treasury can pay certain priority items (such as interest) and not others (such as contractors).
The question is whether even this is feasible. Other than interest on U.S. government debt, which is paid through the Fedwire system, the Treasury makes over 80 million individual payments each month through a computerized payment system.
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.When a legitimate obligation of the government is submitted, it is paid. Paying all of certain obligations, part of others and none of some would require a massive reprogramming of complex systems in an impossibly short time. Even if this task were technically possible, choosing among claims for special treatment is of questionable legality and would surely be the subject of massive lawsuits for years to come. Never having defaulted on the national debt, the country is drifting blindly into uncharted waters.
All this is the "good" scenario. I say good because it assumes that the government can continue to borrow. Can we be sure that the government can avoid default on its Treasury debt while defaulting on nearly all of its other obligations? If not, the result is catastrophe. Treasury's modest cash reserves will evaporate overnight. By mid-November, if the Treasury can't refinance the principal due on its bonds, the government will be behind by an additional $3.3 trillion. By Dec. 31, it will be behind $5.5 trillion.
A Treasury debt payment failure will also trigger defaults in the massive credit default swap and derivatives markets that nearly brought the country to its knees in 2008. Many of these are written on Treasurys or otherwise are tied to them. The financial system could melt.
Half of all the U.S. debt is owned by non-Americans. If foreign owners of U.S. debt, including foreign governments, grow wary of rolling over the maturing debt they own, U.S. Treasury financing will fail. Maybe foreign powers in the Middle East and Asia will be kind to us—but at what long-term costs and obligations? After all, beggars can't be choosers.
It is time for both sides in Congress, and the White House, to hit the reset button and do the job the country needs and elected them to do. Using the debt ceiling to settle domestic squabbles is playing Russian roulette with a loaded gun. And worse, by continuing on the present course, we are playing a deadly game with a gun held by some of this nation's biggest rivals.
Mr. James is president and chief operating officer of Blackstone.
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