The AP Misreports the Debt Ceiling

I wrote here that no matter what happens with the debt limit, the federal government will not default on its debt obligations. I also noted here that Moody’s–which certainly ought to know–agrees that there is zero chance of default on Treasury bonds. In recent days, many more commentators have made the same point. The government is legally obligated to recognize its debt obligations, and the existing $17 trillion debt can be serviced on less than ten percent of federal revenue. So there simply can’t be a default.

But the Associated Press continues to carry water for the Democrats, conjuring up a catastrophe where none exists: “AS US DEFAULT NEARS, INVESTORS SHRUG OFF THREAT.” The AP never considers the possibility that investors are shrugging it off because they are smart enough to know it can’t happen.

Warren Buffett likens it to a nuclear attack. Economists warn that government spending on programs like Social Security would plunge. The Treasury says the economy would slide into a recession worse than the last.

Yet you wouldn’t know that a U.S. debt default could amount to a nightmare from the way many companies and investors are preparing for it: They aren’t.

Note how, from the beginning, the AP mixes up issues. Would a default on U.S. Treasury bonds be a disaster? Of course. No one denies that. But what does that have to do with spending on programs like Social Security? Social Security is not a debt obligation; and, in any event, it is discretionary spending that would be cut if the debt ceiling were reached, not entitlements.

Brian Doe, a wealth adviser at Gratus Capital Management in Atlanta, has 35 clients who’ve entrusted him with $50 million for safekeeping. He isn’t losing sleep over a potential default. Neither are his clients, apparently. Not one has called him about the issue, he said.

Might this not be a clue?

That worse case is inching closer. The Treasury says it will run out of money to pay its bills if Congress doesn’t increase its borrowing authority by Thursday. That includes paying interest and principal on already issued U.S. Treasurys, considered the most secure financial bet in the world.

The Treasury says that without the ability to borrow more than the $17 trillion we already owe, the federal government won’t be able to “pay its bills.” What they mean by that is that spending will be cut: henceforward, it will have to equal revenue, just as though a balanced budget amendment had been enacted. When Democrats talk about “paying our bills,” they mean maintaining spending at ever-growing levels. But the AP wasn’t satisfied with that; they gratuitously added that claim that “that includes paying interest and principal on already issued U.S. Treasurys.” It doesn’t. The federal government can service its existing debt–i.e., pay the interest–on less than 10% of revenues. And it can renew the principal amount of that debt, $17 trillion, forever, simply by rolling it over. When the government issues new bonds to pay the principal on old ones that mature, there is no net increase in federal debt. So the AP’s claim that bond principal payments are somehow endangered–i.e., that default could occur–is sheer ignorance.

One area of concern is Treasury bills that mature shortly after Thursday. The fear is that owners of those bills may not get their money returned to them in case of a default.

Again, this is simply wrong. Existing bondholders will be paid off without any increase in net federal debt.

Stuart Speer, a financial advisor in Shawnee, Kan., learned that the hard way two years ago. In August 2011, the U.S. came close to defaulting and S&P downgraded Treasurys. Speer dumped Treasurys from his holdings, fearing many investors would do the same and prices would tumble. But others ended up buying Treasurys and prices rose sharply.

The AP retails an urban legend. S&P downgraded America’s debt after Congress and the Obama administration made a deal to increase the debt ceiling. The reason for the downgrade was not an ostensible fear of near-term “default,” but rather the fact that the 2011 deal, which included the sequester, didn’t do enough to address the U.S.’s long-term debt problem.

The AP, while peddling the “default” myth, is willfully blind to what is really happening in the economy:

Spooked by the financial crisis, big U.S. companies in the S&P 500 stock index have piled up a record $1.1 trillion of cash. They’ve drawn criticism for not using it to expand or hire.

But the move may end up being wise. Many now have enough to pay their bills for several months in a pinch, letting them avoid the panicked lenders that refused them money in the financial crisis. The cash cushion may help explain why U.S. stocks haven’t sold off more as default approaches.

This has nothing to do, obviously, with the supposed threat of “default.” Companies are piling up cash for a number of reasons that relate in large part to lack of confidence in the Obama administration. Much of that cash was earned overseas but cannot be repatriated because of perverse double-taxation tax laws that the Democrats refuse to change. Further, cash is being stockpiled because companies don’t dare hire workers on account of Obamacare, and are waiting to see what blows the Obama administration still has in store for the economy. It is safe to say that little if any of the reserved cash to which the AP refers has anything to do with a fear that the Treasury Department might break the law and fail to pay off America’s bonds.

It must be nice to be a Democrat: the world’s largest source of “news” makes stuff up to support whatever ludicrous talking points you may want to propagate.

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