Last week I addressed the government" shut-down" providing some historical factual information - something that is not widely shared by the press. This week, I turn to the debt ceiling and specifically, how the Treasury market is likely to be affected.
First, we must clarify some of the facts, once again.
October 17th is the date which the Treasury tells us they will run out of money, meaning they will no longer have the legal authority to increase debt but will continue to have the legal obligation to pay bills. These bills include interest on the debt, salaries, vendor/supplier/contractor payments, social security and other obligations.
It does not mean the Treasury cannot issue debt, only that the total amount outstanding cannot legally arise above $16.7 trillion. So, as Treasury bonds mature, the government will be able to roll over these obligations into new debt, mostly at a lower interest rate, in fact.
Why is the interest rate lower? Because Treasury buyers around the world, including banks, central banks, insurance companies, governments, sovereign wealth funds, and pretty much investors of every other stripe will continue to buy U.S. government debt.
In other words, principal payments are not at risk, with one caveat I will address below.
Turning to the interest portion on the debt, Treasury is obligated to pay about $30 billion per month. But they receive between $150 and $250 billion per month in revenue.
With a minimum of a 5-to-1 coverage ratio, there is plenty of cash rolling in each month to pay interest. Therefore, the question of whether the U.S. government will default on Treasury debt is one of prioritization.
I am no political analyst, but the uncooperative attitude in Washington today is the only thing that puts Treasuries at risk, and here's how:
Once we reach the limit of the Treasury's borrowing authority, the administration will, by definition, be in violation of the Constitution. Either we will be reneging on obligations, by not paying some of our bills on time, or we will be issuing debt over and above the legislated ceiling.
Issuing debt in defiance of Congressional limits is not politically feasible. Such an outright dismissal of Congressional authority by the Executive Branch would be quite harmful to the Democrats.
But withholding payments to certain politically sensitive groups because the Republicans have placed such limits on borrowing could be a win for the Democrats. And because the Democrats will be in charge of prioritizing payments, they have all the power in this scenario.
Eventually, we know, the U.S. will pay all its bills. The question is which payments are the most politically expedient to withhold that will do the most damage to Republicans without creating long term damage to the economy or the U.S. as a whole?
I'm no political analyst, but I would guess a repression of social payments that continue to exacerbate the Democrats' 99 vs. 1 percent argument would be the way to go.
This means interest and principal payments on actual Treasury debt will be secure.