Treasury Says Anything But A Debt Ceiling Hike Would Lead To Default, As M.A.D. Escalates A Notch

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After in the past week, the blogosphere had been hobbled by one after another mindless oped claiming that the US can easily avoid default by just paying the interest on its obligations, and thus does not have to worry about the debt ceiling, we decided to put some sense to this debate when we pointed out that the "US Debt-to-Deficit Difference Hits Fresh Record, As Treasury Continues To Issue 50% More Debt Than Needed To Fund Deficit" meaning that i) it is not a debt ceiling, it is a debt target (© Lizzie363), and ii) the hundreds of billions of monthly obligations that are funded through debt, are "legal" obligations of the US government that have to be paid in full every month or a default will occur regardless. Neal Wolin, Deputy Secretary of the Treasury, has just released a statement on the Treasury's blog saying pretty much just that. Which, however is certainly not a good thing, as it merely confirms just how totally screwed this country is, and that absent a hike in the ceiling to $15.5 trillion (which we believe is where the debt ceiling will be through March of 2012 when it will be raised to $17 trillion), the dollar will be backed by several trillion in insolvent Federal Reserve Notes, er, assets (that should quickly end all debate about EUR-USD parity). It also confirms that Bernanke has no choice but to continue monetizing debt, through QE and to do that, he needs to make it palatable to the general public, which in turn will mean either a material economic deterioration, or, as the two are apparently identical in the Chairbeast's mind, the Russell 2000.

Just issued by the Department of Turbo Tax Failure:

Treasury: Proposals to “Prioritize” Payments on U.S. Debt Not Workable; Would Not Prevent Default

By:
Neal Wolin
1/21/2011


In
his January 6, 2011 letter urging that Congress act to protect
America’s creditworthiness by increasing the statutory debt limit
,
Secretary Geithner made clear that any default on legal debt obligations
of the U.S. would be unthinkable.  In response, Members of Congress of
both parties have indicated agreement that the United States must honor
its obligations.   However, Treasury disagrees with
suggestions by some that Congress could somehow evade this
responsibility by passing legislation to “prioritize” payments on the
national debt above other legal obligations of the United States. 

While well-intentioned, this idea is unworkable.  It
would not actually prevent default, since it would seek to protect only
principal and interest payments, and not other legal obligations of the
U.S., from non-payment.  Adopting a policy that payments
to investors should take precedence over other U.S. legal obligations
would merely be default by another name, since the world would recognize
it as a failure by the U.S. to stand behind its commitments.  It would
therefore bring about the same catastrophic economic consequences
Secretary Geithner has warned against, including sharp rises in mortgage
interest rates and other borrowing costs for families; reductions in
the value of homes, 401(k)s and other retirement savings; and negative
effects on the dollar and the safe haven status of Treasury bonds and
other Treasury securities.   Such a policy
would also be unacceptable to American servicemen and women, retirees,
and all other Americans, who would rightly reject the notion that their payment has been deemed a lower priority by their government.  For these reasons,  the
Department of Treasury has always emphasized – regardless of which
party has held the White House or either house of Congress – that the
only way to prevent default and protect America’s creditworthiness is to
enact a timely increase in the debt limit.

Neal Wolin is Deputy Secretary of the Treasury.