The United States Will Absolutely Default

by A Blinkin on January 19, 2013

A few days ago, Republican John Cornyn, Chairman of the House Budget Committee, said “We will raise the debt ceiling. We’re not going to default on our debt.”

He continued, “I will tell you unequivocally, we’re not going to default.”

You can read the brief Politico article here.

Congressional Confidence

I appreciate the Republican Rep’s confidence and I agree with him partly; but, not completely.

We will absolutely raise the debt ceiling. And we will absolutely default on our debt.

I know that solving one (raising the debt ceiling) is supposed to solve the other (avoiding default),  but that’s not necessarily true. Because there are different kinds of default.

Who’s at (De)fault?

The first kind of default is the most obvious. If the United States government admitted to their inability to pay their bills. It could come in a number of different forms. Either bondholders would not receive their interest payments. Government employees would not receive their paychecks. Or your granny would not receive her Social Security check. The United States has never, ever defaulted in this way. If the United States were to default in this manner, there would be a ripple effect within the global financial markets that could be devastating. The sky is blue, the world is round and the United States doesn’t default.

The United States Defaults, Without Defaulting

Remember a few weeks back, I posed a question of “Would You Rather…”? I asked, if you receive a check from the government, if you would rather receive 75% of what you were getting – or – if you would rather receive the same amount but have everything else cost 25% more.

It’s funny because it’s the same result, but one is seen as CRAZY, RIDICULOUS, and UNTHINKABLE while the other is historically acceptable. Inflation is just part of economics, right?

Conclusion

We have about $16 Trillion in national debt. If you factor in the unfunded future liabilities, the estimates are closer to $100 Trillion. These numbers are absolutely unreal. No combination of economic growth and increased revenue could balance the fiscal imbalances we face. Therefore, the ONLY OPTION we have is to default. Whether we directly reduce government spending or devalue the dollar through inflation, it doesn’t much matter.

The result is, essentially, the same.

Tagged as: debt ceiling, default, politics, united states

  • http://www.moneylifeandmore.com/ Lance@MoneyLife&More

    One is a technical default and one is changing benefits through legislation. Debt is a solid obligation while Social Security and Medicare aren’t promised. They’re only around as long as we can pay for them.

    • Funancials

      Rather than using Social Security, we can apply the idea to a government employee’s paycheck. If they are being paid with dollars that aren’t worth as much, it has the same effect on their finances.

  • http://mymoneycounselor.com/ Kurt Fischer

    Well, that is a rather bleak view! I’m not necessarily disagreeing–just saying it’s bleak. :) Serious question: Do you have a sense of when any of the forms of default you outline will begin? (I’m hoping your answer is beyond my life expectancy.)

    • Funancials

      You are witnessing the effects, already. I don’t think the US will technically default or reduce spending. Instead, the US is going to pay with dollars that aren’t worth as much. Think about it this way…would you rather have owed someone $10,000 in 1970 or $10,000 now? Since $10,000 isn’t as much as it was in 1970, you would choose now. In the same respect, the US Government is going to make the debt easier to pay through inflation (devaluing the dollar).

      So, unfortunately, it will be in your lifetime. You’ll most likely feel it when prices are going up 10% per year and your Social Security is just staying the same.

  • http://simplefinanceblog.com/ Elizabeth_SimpleFinance

    I’m with Kurt, that’s pretty bleak… but I see the point you’re trying to make. We’re really at a make or break point in our country’s history, and unless these parties can somehow come together and work as a team – what’s best for ALL of us – there’s no way we’re going to survive with the hopes and dreams of our founders intact.

  • http://www.mymoneydesign.com/ MyMoneyDesign

    Good points. I never understand how raising the debt ceiling solves things. Just because I fudge the numbers in my budget doesn’t mean I have more money or should borrow more. I love these types of paradigm shifts in the way we look at things.

    When will we default? When the other countries come to collect (and we can’t pay)!

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  • William_Drop_Dead_Money

    Have other countries ever defaulted on their debt? What happened after that?

    • Funancials

      Absolutely. Venezuela and Russia – 1998ish. Argentina – 2001.

      Typically the debt is restructured -or- the country receives a bailout. Beyond that, investors no longer view the bonds as “risk-free.”

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  • http://www.myjourneytomillions.com Evan@MyJourneytoMillions

    I am far removed from my econ class – but why haven’t we been crippled by inflation already? How many trillions have been pumped through our system in the past 4 years?

    Completely agree with the sentiment though. Sucks its going to happen during our lifetime lol

    • Funancials

      Inflation typically appears in asset prices before consumer prices. ie: stock prices, bond prices and real estate.

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