Geithner Won't Default on the Public Debt

By :: January 19th, 2011

In a guest column at CNN Money, I argue that Treasury Secretary Timothy Geithner won't allow us to default on the public debt even if Congress fails to increase the debt ceiling:

America reached two dubious milestones in recent weeks.

Our national debt, including Social Security obligations, has run up to nearly $14 trillion. That's a lot of money, even in Washington.

And our Treasury Secretary started using the d-word. Writing to congressional leaders, Timothy Geithner warned that failing to increase America's debt ceiling, currently $14.3 trillion, "would precipitate a default by the United States."

"Default" is not a word that Treasury secretaries use lightly. For more than two centuries, the United States has paid its debts on time. That's why U.S. Treasuries have historically been considered the safest investment in the world.

When Geithner was sworn into office, he took responsibility for defending the full faith and credit of the United States.

So why is he openly discussing the possibility of default? Because of the peculiar political theater of the debt limit.

Alone among developed nations, our country separates the legislative decisions that govern spending and taxes from those that govern debt.

As a result, America must periodically watch its elected leaders try to avoid voting for higher debt, even though most of them happily voted for higher spending, lower taxes or both.

During these spells of political brinkmanship, the Treasury secretary's job is to prod Congress into action.

Given today's political divisiveness, Geithner understandably decided -- as did his predecessors in similar circumstances -- that the best way to defend America's credit worthiness is, paradoxically, to warn of potential default if Congress fails to act.

Geithner is correct that the debt limit must increase. With monthly deficits running more than $100 billion, it's simply unthinkable that Congress could cut spending or increase revenue enough to avoid borrowing more. America's daunting fiscal challenges require bold action, but it must be thoughtful and deliberate, not arbitrary and sudden.

Still, I am troubled by any suggestion that the United States might willingly default on its public debt. Doing so would have absolutely no upside. That's why I'm confident that Geithner won't let it happen.

If Congress somehow fails to increase the ceiling in time, Geithner would do everything in his power to avoid going down in history as the first Treasury secretary to miss a debt payment.

To do so, he would use the same tactics as any stressed debtor.

Squirrel it away: First, Geithner would hold on to his cash and what little credit he has left. Among other things, he would eliminate unneeded borrowing associated with certain obscure programs such as the Exchange Stabilization Fund and a state and local debt program.

Turn to family for help: He would call in money from his relatives, in this case the Federal Reserve. During the financial crisis, Treasury created a special program to borrow money on the Fed's behalf; that borrowing now totals $200 billion. Treasury temporarily wound this program down the last time we got close to the debt ceiling. Expect the same this time.

Promise to pay later:He would issue IOUs (which don't officially count as debt) to friendly creditors who have no choice but to accept them. Geithner's predecessors did this with two retirement funds for government employees, both of which were later made whole. In his recent letter to Congress, Geithner said he'd do the same.

Sell stuff: Lastly, Geithner would look for assets that are easy to sell. Thanks to the financial crisis, Treasury now owns a sizeable investment portfolio, including stakes in auto companies, banks and other financial institutions. Don't be surprised if Treasury cashes in some of these positions to raise cash in coming months.

Those tactics would give Congress time to work through its differences and raise the debt limit.

If lawmakers fail to act on time, however, Geithner would face starker choices: Our monthly bills average about $300 billion, while revenues are about $180 billion. If we hit the debt limit, the federal government would be able to pay only 60 cents of every dollar it should be paying.

But even that does not mean that we will default on the public debt. Geithner would then choose which creditors to pay promptly and which to defer.

As the heir to Alexander Hamilton, Geithner would undoubtedly keep making payments on the public debt, rolling over the outstanding principal and paying interest. Interest payments are relatively small, averaging about $20 billion per month, and paying them on time is essential to America's enviable position in world capital markets. To miss even one is and should be unthinkable.

Other creditors would have to wait in line. Treasury would defer payments to some groups of creditors, perhaps including Social Security beneficiaries, Medicare providers, military personnel, weapons vendors or taxpayers expecting refunds.

Missing such payments would be another dubious milestone in America's fiscal journey -- so dubious, in fact, that the resulting constituent outrage would likely force Congress to increase the debt ceiling immediately.

Here's to hoping that Congress doesn't let things go that far and get that bad.

P.S. Stan Collender, Greg Ip, and Felix Salmon have also made the point that hitting the debt limit might cause the the government to delay some payments to some creditors (technically a type of default), but will not and should not default on the public debt.



  1. Sid F  ::  8:14 pm on January 19th, 2011:

    Your last two paragraphs are the main point here. The earlier part of the article is technically correct but absolutely the wrong policy.

    In order hold the administration hostage the Repubicans will not vote to extend the debt ceiling. The procedures outlined which will allow the government to continue to operate will only extend the battle, and unless the Obama administration takes a tough line they will eventually cave. In order to win any battle, restore credibililty and popularity the Obama Administration must be willing to default (temporarily) on the U. S. debt in order to avoid a huge political defeat. Faced with default Republicans will back down. Faced with the liklihood of Obama caving, they will not back down.

    Of course, based on history, we probably know which way this is going.

  2. The American Spectator : AmSpecBlog : The Cards up Geithner’s Sleeve  ::  11:46 am on January 20th, 2011:

    […] Congressional Budget Office acting director Donald Marron lays out some of the alternatives to default that Treasury secretary Tim Geithner could pursue in the case […]

  3. Fiscal Future Daily: On Record for Repeal, Yet Fiscally at the Same Place « Choosing the Nation's Fiscal Future  ::  11:54 am on January 20th, 2011:

    […] Marron at the Tax Policy Center is the latest to weigh in on why failing to raise the debt ceiling won’t automatically mean a default: “Still, I am troubled by any suggestion that the United States might willingly default on its […]

  4. Michael Bindner  ::  3:10 pm on January 20th, 2011:

    I expect that on this issue, seven Republican Senators and Twenty Five Members of the House can be found to do the right thing, which will effectively create a Democratic governing majority on fiscal issues. This is what happened in the late 90s when Clinton had to deal with divided government.

    You could also give the GOP a symbolic victory with passage of the 2011 budget with some minor cuts

    The other possiblity is progress on advancing the work of the Fiscal Commission. The Commission did not draft implementing language. It could be reconstituted with a partisan split to reflect current reality, given adequate staff and budget and tasked with drafiing the necessary language for an up or down vote, due at about the time the new extension of the debt limit is due to run out.