A Debt Default and ‘no Social Security Checks’ only Scare Tactics in the Budget Debate to Raise the Debt Limit

Posted by PITHOCRATES - July 25th, 2011

A Summary of the Budget Debate to Raise the Debt Limit

One day making tracks in the prairie of Prax came a tax-raising Zax.  A tax-raising Zax.  And a spending-cuts Zax.  A tax-raising Zax.  And a spending-cuts Zax.  And it happened that both of them came to a place where they… *boom*  There they stood foot to foot.  Face to face.

“Look here, now,” the tax-raising Zax said.  “I say, you are blocking my path.  You are right in my way.  I’m a tax-raising Zax and I always raise taxes.  Get out of my way, now, and let me raise taxes.”

“Who’s in whose way?” snapped the spending-cuts Zax.  “I always cut spending making spending-cuts tracks.  So you’re in my way and I ask you to move and let me cut spending in my spending-cuts groove.”

Then the tax-raising Zax said with tax-raising pride, “I never have taken a step to one side.  And I’ll prove to you that I won’t change my ways if I have to keep standing here 59 days.”

“And I’ll prove to you,” yelled the spending-cuts Zax.  “That I can stand here in the prairie of Prax for 59 years.  For I live by a rule that I learned as a boy back in spending-cuts school.  Never budge that’s my rule, never budge in the least.  Not an inch to the west, not an inch to the east.  I’ll stay here not budging, I can and I will.  If it makes you and me and the whole world stand still.”

(The Zax, from The Sneetches and Other Stories by Dr. Seuss, slightly modified)

Spending worries most Americans

If neither Zax is moving, at least there’s no spending.  And it appears that it is the spending that worries most Americans.  Based on the polling.  Which shows the spending-cuts Zax gaining support (see GOP has 10-point edge on Democrats in public trust on economic issues in latest Rasmussen Reports national survey by Mark Tapscott posted 7/24/2011 The Washington Examiner).

Republicans have gained a 10 point lead over Democrats in Rasmussen Reports latest national survey on who the public most trusts to deal effectively with economic issues.

The 10 point lead is the widest margin held by either party in months and has opened up in recent weeks as President Obama and House Speaker John Boehner have become the central players in the debate over how to deal with the approaching debt-ceiling crisis.

It seems pretty clear.  The people want the tax-raising Zax to take a step to the spending-cuts side.

You can’t Fool the Bond Market

And while one Zax stands foot to foot with the other Zax, not budging, the bond market is not all that worried.  Which is kind of odd being that they hold the debt that Obama, Geithner, Pelosi, Reid, etc., warn they may default on (see U.S. bond market: Watching and waiting by Ben Rooney posted 7/25/2011 on CNN Money).

As policymakers in Washington continue to butt heads over the debt ceiling, the response in the bond market Monday was relatively subdued…

…many bond market watchers suggested that stocks are more vulnerable to the ongoing debt ceiling drama. By contrast, some say Treasuries could actually benefit from a flight to safety if the debt ceiling isn’t raised.

This seems counterintuitive.  Especially with all of the dire predictions coming out of Washington.  But it turns out that you can’t fool the bond market.

Another reason why Treasuries have held their ground is that a default would not necessarily result in huge losses for holders of U.S. debt. Treasury would probably have to furlough workers and make other adjustments if the debt ceiling is not raised, but analysts do not expect it to immediately miss interest payments on the federal debt.

The money is there.  Some money.  Tax revenue is still making it to Washington.  Almost $200 billion each month.  The bond market knows this.  They’ll get their interest payment.  Still, there could be some fallout from a downgrading of U.S. debt. 

…many institutional investors, including money market funds and pensions, are required to hold only AAA-rated securities. If the U.S. government is downgraded, those funds may be forced to dump billions worth of U.S. paper.

This could wreak a little havoc.  But probably no more than a downgrade due to the lack of resolve to restrain out of control spending which is the root cause of all these budget problems.  One way or another, we have to cut spending to ultimately calm the bond rating agencies.

Businesses are more Worried about the Tax Code

And they aren’t that worried in corporate America either (see Analysis: CEOs count on cash to cushion default risk by Scott Malone posted 7/25/2011 on Reuters).

Bankruptcy attorney Martin Bienenstock, of Dewey & LeBoeuf LLP, said it seemed like most business people were dismissing the likelihood of a default

“People still don’t think there is going to be an actual default,” Bienenstock said. “There doesn’t seem to be any domino effect brewing yet with the concept of ‘rates will rise and companies on the brink will fail and things like that.'”

If the U.S. runs out of money it is more likely that there will be a partial government shutdown.  Not a default.  And, to be frank, there isn’t a lot these businesses need from government.  Other than a simplified tax code.

While businesses would balk at paying higher taxes, CEOs have said that what they want right now is to have the tax debate settled so they know what they will be paying in taxes.

A government unable to pay its bills won’t affect them.  But not knowing what their taxes will be will.  Because the government shakes them down for a lot of money.  And they have to plan accordingly.  Like having a forklift and other heavy-lifting equipment available to lift those vast sums of cash.

Social Security Checks will go out Regardless

It would appear that most aren’t falling for the scare tactics of Obama and the Democrats.  But what about the seniors?  Will they get their Social Security checks?  Team Obama has been playing this card every chance someone places a microphone in front of them.  So what about Social Security?  Should seniors worry about not getting their checks?  As it turns out, no (see Contrary to the President, Social Security Checks Are Not At Risk by Michael McConnell posted 7/23/2011 on Advancing a Free Society).

The Social Security trust fund holds about $2.4 trillion in U.S. Treasury bonds, which its trustees are legally entitled to redeem whenever Social Security is running a current account deficit. Thus, if we reach the debt ceiling…, this is what will happen. The Social Security trust fund will go to Treasury and cash in some of its securities, using the proceeds to send checks to recipients. Each dollar of debt that is redeemed will lower the outstanding public debt by a dollar. That enables the Treasury to borrow another dollar, without violating the debt ceiling. The debt ceiling is not a prohibition on borrowing new money; it is a prohibition on increasing the total level of public indebtedness. If Social Security cashes in some of its bonds, the Treasury can borrow that same amount of money from someone else…

President Obama is therefore wrong when he says that failure to raise the debt ceiling might result in not sending out Social Security checks. Many bad things might happen, but not that.

Interesting.  So Social Security checks will go out.  Automatically.  Even if the current account is in deficit.  Because of that glorious trust fund stuffed with treasury securities.  In fact, the only way checks won’t go out is if Obama prevents this automatic mechanism to score some political points by falsely blaming Republicans.  Which will be risky.  Because people will eventually learn the truth.  If they don’t know it already.

The Tax-Raising Zax needs to Step to the Spending-Cuts Side

The tax-raising Zax had better learn to swallow his tax-raising pride and however reluctantly he should now take that first step to the spending-cuts side. 

For the people and the bond market and businesses agree.  The problem is spending.  Much too much spending as you must by now plainly see.

And leave our seniors alone and frighten them not with horrors of checks that won’t come their way.  For the trust fund is brimming with securities aplenty that can be cashed to pay all promises made without delay.

Unless Social Security has been a big Ponzi scheme all along.

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