There Are Options to Avoid a Debt Ceiling 'Default'
The U.S. has options that will avoid a 'default'
October 15, 2013
A few weeks ago, President Obama warned, "as reckless as a government shutdown is ... an economic shutdown that results from default would be dramatically worse."
Testifying before Congress this past week, the Treasury Secretary spoke of the "irrevocable damage" that default would cause.
No one is denying that there would be severe consequences if the United States actually defaulted on its obligations. When you consider what's at stake, the responsible thing to do would be to consider every possible vehicle for avoiding default.
The Debt Prioritization Bill passed last year exempted interest on U.S. debt from any type of borrowing cap – meaning there would always be borrowing capacity equal to the interest owed to our creditors, taking the theatrical threat of "default" off-the-table. To say that the federal government would not have enough money incoming to the Treasury to cover our debt expenses while politically expedient is irresponsible and disingenuous.
Recently, I sent a letter to the Treasury Secretary urging the Obama administration to abandon its counterproductive rhetoric and instead pursue alternative, creative and common sense solutions to default, such as H.R. 3052, the Debt Ceiling Alternative Act.
The federal government currently has more than $9 trillion in surplus assets on its books. That includes as much as $1.8 trillion in so-called "forgotten funds," which sit unused in the bank accounts of federal agencies and departments. In recent months, the American people have seen reports of egregious abuse of taxpayer dollars, from government bureaucrats wasting millions-of-dollars to host lavish conferences for themselves in Las Vegas to the IRS admitting it cannot account for $67 million in an Obamacare slush-fund.
The American people are asking themselves: How can the federal government have enough money to waste on so much and then turn around and tell all of us it doesn't have enough money to pay it's bills?
Now that the White House has begun talking to Congress, we need to move the dialogue beyond politics and towards common sense and long-term solutions that address how the United States should manage its massive debt.
Our approach needs to stretch beyond the immediate here and now and begin laying the groundwork for responsibly addressing our long-term fiscal needs. We need to minimize adverse interest rate exposure, while adding options that both the current and future Treasury Secretaries can viably utilize.
When the current Administration leaves, U.S. sovereign debt will be approximately $22 trillion heading into a demographic cycle (the retirement of the baby-boomers) that will see a dramatic increase in the growth of our debt. For far too long, Treasury has chosen a risky strategy of shortening the duration of the nation's financing instruments by borrowing in one week, one month, six-month and one year instruments, instead of borrowing in five to 10-year instruments. This exposes us to the dangers of a volatile interest rate environment. Rolling a portion of our nation's debt into long term servicing instruments, such as a 60-year bond, will allow us to manage our debt exposure beyond the baby-boomer demographic bubble and avoid the danger of a spiking interest rate environment.
In January of 2000, the average interest rate was around 6.6 percent; today, recent estimates place average interest rate on U.S. debt at 2 percent. To appreciate the scale of this difference, think of it this way - we are estimated to spend $237 billion in interest in 2014, but in an average interest rate environment that interest cost would be closer to $740 billion, or close to 75 percent of our entire discretionary budget.
The truth is our country possesses a variety of options that should be pursued before we even think about defaulting on our obligations. By combining assets sales from Fannie Mae and Freddie Mac, mortgage-backed securities, spectrum, federal property and a sweeping of unobligated appropriations balances, it is conceivable that we could reach primary balance in fiscal year 2014.
Over the next couple of decades, America faces an almost incalculable explosion of debt. In order to prevent the U.S. economy from being crushed under the weight of this debt, we in Congress and the administration must begin looking at creative ways to ensure the financial stability of future generations of Americans. The reality is we cannot continue borrow our way into prosperity.