This article was first published at The McAlvany Intelligence Advisor on Monday, October 7, 2013:
The so-called “brinkmanship” press release by the Treasury Department reveals far more about the willingness of the media to report and repeat a canard that it does about the “crisis” facing the US if the government defaults.
Here are the title and just the opening paragraphs from the Treasury Department:
The Potential Macroeconomic Effect of Debt Ceiling Brinkmanship
The United States has never defaulted on its obligations, and the U.S. dollar and Treasury securities are at the center of the international financial system.
A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008, or worse.
First off, the US has defaulted on its obligations, not once but several times. Secondly, when the government “modifies” any of its promises – extending the retirement age for Social Security, for instance – isn’t that a de facto default?
Secondly, a default would not be unprecedented and has not been proven to be “catastrophic.” The lightweights at Treasury ought to be asked, what about Argentina? What about Iceland? What about Mexico? What about Russia? Are they not able to have access to the credit markets despite defaulting on their sovereign debt?
But facts and history don’t matter. The report barges ahead with its canned conclusion:
Increased uncertainty or reduced confidence could lead consumers to postpone purchases and businesses to postpone hiring…
A precise estimate of the effects is impossible, and the current situation is different from that of late 2011 … but a large, adverse and persistent financial shock like the one that began in late 2011 would result in a slower economy with less hiring and a higher unemployment rate than would otherwise be the case.
The disclaimers that reveal that all of this is just conjecture abound: “could lead” … “a precise estimate of the effects is impossible” … “would result in a slower economy”… Where is the proof?
The report is stuffed full of charts and graphs of consumer confidence, small business optimism, stock market performance, the VIX, and waxes eloquent and profound on the importance of “Ten-Year BBB Corporate Bond Spreads” and “30-Year Conventional Mortgage Spreads” following the August 2011 “crisis” that was wonderfully and thankfully resolved by the Budget Control Act. But nowhere in the report is there a graph or a chart, nor even a statistical reference, to what actually happened to the economy in the months and years following that crisis: not one.
The reason? None exists. Instead, what history reports is that the economy in 2012 grew by 4.5 percent, that two of the three credit rating agencies kept their AAA rating on US sovereign debt, and that interest rates rose so slightly as to have an imperceptible effect on borrowing costs to the government. The scary scenario upon which the Treasury built its case simply holds no water whatsoever.
But the media couldn’t have cared less. If these pontifications emanated from the worthies at Treasury they must be true. And so the echo chambers reverberated endlessly and mindlessly about the catastrophe that awaits if the government defaults.
First was Toronto’s Globe and Mail, headlining its article on the Treasury release: “The Doomsday Scenario of a U.S. Default.” It noted that banks were putting extra cash into their ATMs, just in case, and quoted some obscure economist in an equally obscure London economic consultancy who reiterated the falsehood promoted by the Treasury:
If Congress doesn’t reach an agreement to raise the debt ceiling before the U.S. Treasury runs out of ways to keep the “essential” parts of the government running … then the U.S. may not have enough cash to meet … a debt interest payment of about $30 billion on November 15th, potentially triggering a technical default.
That this is a falsehood is proved by simple math: tax revenues exceed $200 billion a month. Interest on the $17 trillion national debt (ignoring that a huge part reflects money owed to various government agencies by other government agencies) is about $40 billion a month. That means that interest is “covered” five times over. There is simply no way that that interest payment won’t be paid on time. But such a revelation wouldn’t prove the point, so it isn’t mentioned by the worthy from London.
Reuters took a slightly different tack. Entitled “Nightmare on Main Street: What a Default Might Look Like,” it believed what the Treasury said and then set out to prove how it might play out over the next few weeks based, it said, on Treasury “statements” from a year ago. The trip down the road to fantasy land is worth taking:
On October 17th, the Treasury Department exhausts all available tools….
It takes in $6.75 billion in taxes but pays out $10.9 billion in Social Security retirement checks. By the end of the day, [the Treasury’s cash cushion] has eroded to $27.5 billion.
[On October 30th] default happens … the government is $7 billion short of what it needs to pay all of its bills.
[On Thursday] things get really spooky on Halloween when a $6 billion interest payment to bondholders comes due.
What happens next? Continuing in dreamland, Reuters considered the alternatives faced by Treasury, neither of them good:
In theory, the government could keep the bondholders whole indefinitely because tax revenues are more than enough to cover interest payments….
[But] that would be longer delays for everybody else. U.S. troops could fall behind on their rent payments, and seniors who rely on Social Security may have trouble buying groceries.
If … the Treasury missed the Halloween interest payment … the creditworthiness of the country could suffer. That would throw the value of almost every financial instrument into question: the U.S. dollar, bank loans in Asia, the cost of crop insurance in Illinois.
Even Barrons got into the act. Its weekend edition headline “Will the U.S. Default?” was followed by the predictable forecasts of calamity, along with some political jibes, just for good measure:
The intractable battle of wills has gone on and on … that has increased the odds of a debt default by the U.S. Treasury.
The fanatical, small-government, free-market-loving Tea Party faction of the House’s Grand Old Party is engaged in a dangerous game of fiscal chicken with the equally fanatical big-government, welfare-state-loving Senate wing of the Democratic Party.
Default looms, and neither side will blink.
There is another side to the issue that the media has ignored entirely: would any good come out of a default, if it happens? Joel Skousen, in his World Affairs Brief (gated, unfortunately), thinks so. He estimates that a default would force the government to lay off 45 percent of the FDA’s workforce, along with those at the EPA (which Skousen calls “one of the most politically charged and evil of government agencies”). The CIA would be forced to lay off 12,500 of its workers while 90 percent of the IRS workforce would be placed on furlough. How could that not be a good thing, forgetting about the savings?
It’s more than sad – it’s tragic – that the kept media is so willing to go along with the Treasury’s propaganda piece when with just a little effort they could have learned that it was pure speculation masquerading as sound research and conclusion.
The Globe and Mail: The Doomsday scenario of a U.S. default
Barrons: Will the U.S. Default?
Joel Skousen’s World Affairs Brief: SELECTIVE GOVERNMENT SHUTDOWN: THE POLITICAL AGENDA (partial only – subscription required)
The U.S. Treasury’s press release: THE POTENTIAL MACROECONOMIC EFFECT OF DEBT CEILING BRINKMANSHIP