Debt Ceiling Myths

August 4, 2011

Free Market Foundation

Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University, dispels some common debt ceiling myths.

Myth 1: If a deal is not reached by August 2, the United States will default on its debt.

Fact 1:

The Treasury Department can prioritise payments in order to avoid a default.

In addition, the Treasury could sell some of its assets in order to pay the bills.

Myth 2: If the debt ceiling isn’t raised the government won’t be able to pay Social Security benefits.

Fact 2:

There are approximately $2.6 trillion dollars in the Social Security Trust Fund; those assets can be used to pay benefits.

Furthermore, there is already trillions of dollars of interagency debt that counts toward the $14.29 trillion debt limit.

Treasury Secretary Timothy Geithner could convert that interagency debt into publicly-held debt, preventing not only a technical default but also preventing any delay in government payments.

Myth 3: The Treasury cannot use the Social Security Trust Fund to delay a default past August 2.

Fact 3:

While the Treasury cannot use money from the Social Security Trust Fund, it can “disinvest” from other trust funds to pay for benefits.

The Treasury Department could also make cash available from the trust fund by “disinvesting” some of the money used to buy government bonds.

The disinvesting approach is a temporary accounting device that would help maintain the Treasury’s cash flow.

These actions, of course, are nothing more than short-term budget gimmicks. But they would allow the United States to avoid defaulting on the debt. Once these options are exhausted, however, there will be nothing left to do but raise the debt ceiling or dramatically cut government spending, says de Rugy.

Source: Veronique de Rugy, The Facts about the Debt Ceiling, Reason Magazine, July 18, 2011.

For text: http://reason.com/archives/2011/07/18/the-facts-about-the-debt-ceili

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

First published by the National Center for Policy Analysis, United States

FMF Policy Bulletin/ 26 July 2011