Conservative historian Bruce Bartlett explains why Tea Party thinking on national debt ceiling is ‘idiotic’
I think there really is a hard limit, but when we would hit that limit I don’t know. But assuming we do, what would then happen is that the Treasury would lack the cash flow to be able to pay its bills. Every single day the Treasury has bills to pay, Social Security benefits, interest on the national debt … But if the debt ceiling is not raised, the only cash it would have to pay those bills would come from the tax revenues that come in on a day-to-day basis — from the payroll tax or from income tax withholding. But that would not be enough to pay the bills that are due that day, so somebody at the Treasury is going to have to decide — as individuals do when their pay doesn’t cover their credit cards and other debts — who gets paid this month and who doesn’t. And, of course, there is a problem with this, because not everybody can be put be off. By law, Social Security benefits have to go out on the first of the month. But the Treasury literally would not have the cash in its account to cover those benefits, or to pay interest on the debt — at which point you have a default. Any time the precise terms of a bond are not adhered to — if you don’t receive exactly the amount of money you were promised, on exactly the day it was promised — you have a default, and that is what would happen under this circumstance.
Do we really want to introduce an element of doubt into the financial markets, that a security that is primarily bought because there is assumed to be risk zero risk of default is no longer safe? There is no other security on earth that has that reputation, not even German government bonds. The U.S. Treasury is the gold standard and we have benefited enormously from this fact. Every time there is some disruption in the world financial markets, people flee to quality by buying Treasuries. As a result, we have benefited by not having to pay for the consequences of our own profligacy. Foreign central banks hold trillions of dollars of Treasuries as the backing for their own securities. The minute we introduce an element of doubt into their own minds about whether these debts will be paid, suddenly other alternative investments may start to look better to them, and we will lose market share, which will greatly increase the costs of borrowing over the long term. It’s the most monumental insanity that I can even imagine.
I really don’t think it makes a lot of sense to shoot ourselves in the foot, just to make an idiotic point about the debt being too large. If people really believe that, they should vote to increase taxes and cut spending, and thereby reduce the Treasury’s need to borrow.