No trillion-dollar platinum coin. No 14th amendment. Time to get down to serious business. If Politico’s reporting from this morning is accurate, then “90%” of House GOP members are ready to allow across-the-board sequestration budget cuts to take effect rather than compromise with President Obama. And “more than half of their members are prepared to allow default unless Obama agrees to dramatic cuts he has repeatedly said he opposes.”
1. I don’t think more than half of House GOPers are willing to accept an actual debt default where Treasury bondholders don’t get paid. More likely what this means is that GOPers are willing to accept a situation where the government can’t pay everyone and is forced to prioritize debt payments. The WSJ today says this is “technically possible.”
2. So now we are talking about what Wall Street terms a “technical default,” where obligations outside of interest payments are delayed. Chris Krueger of Washington Research Group says there is a 20% chance the Congress fails to raise the debt ceiling before the “extraordinary measures” expire, which would result in a technical default on the U.S. debt … 20% may not sound high, but it is high when the odds are supposed to be zero. The 80% is based off of nothing more than blind faith.” And here is Citigroup: “So it is possible that we will get a technical default for a few days, but more likely that Congress will give in, vote the debt ceiling up temporarily, and let the automatic sequesters kick in.”
3. Is a technical default a bad thing? Treasury Secretary Timothy Geithner suggests it is. As he said back in 2011:
‘Prioritization’ also fails to account for how payments on principal would be made if investors were to lose confidence in U.S. creditworthines. … Under normal circumstances, investors who hold Treasuries purchase new Treasury securities when the debt matures, permitting the United States to pay the principal on this maturing debt. Yet in the scenario you advocate, in which the United State would be defaulting on a broad range of its other obligations, there is no guarantee that investors would continue to re-invest in new Treasury securities.
4. Team Boehner is clearly trying to avoid any sort of default, technical or otherwise. Indeed, the GOP background quotes in the Politico story seems part of that effort: “Boehner assumes he can ultimately talk members out of default, [and] Republicans who know him well believe he will never allow default, even if it puts his leadership position at risk.”
5. GOP leaders will try and convince their rank-and-file that the debt ceiling is the wrong fight to pick. Better this one:
[House GOP leaders] are searching for ways to delay that life-or-death choice or convince members that a government shutdown is sufficiently dramatic to make their stand. …The 2013 continuing appropriations resolution expires on March 27, cutting off funding for most federal agencies. It needs to be extended, and Republicans don’t want to do so unless a new continuing resolution reduces spending, too. This is where they could choose to shut down the government to dramatize their contention that for four years Obama has promised in words to cut spending but in action only piled up debt. Many Republicans believe this is precisely what they will do.
6. Politico calls the sequester, “The most likely outcome right now.” A compromise with the president would likely mean replacing half the spending cuts with tax hikes of some sort. Recall that the White House has already released a memo showing how capping upper-income deductions could realistically raise $450 billion to $650 billion over a decade. Doubt GOP goes for this.
7. And what if the sequester should happen? Well, spending would get cut. If the sequester happens and the previous Budget Control Act spending caps hold, spending as a share of GDP would drop to 21.2% by 2018 vs. 22.9% last year.
Let’s look at defense spending for a moment. It would get cut to historic lows, around 2.5% of GDP. Some context: Right before 9-11, the “peace divided” brought defense spending down to 3%. Moreover, defense spending accounted for, on average, a 7% share of GDP from 1948 to 2000.