Conn Carroll

In ten days, the U.S. Treasury will be left with just $30 billion cash on hand, and no legal authority to borrow the additional money needed to pay all of the United States's financial obligations. And yet, for some reason, markets are not acting like the U.S. will default on its debt payments. Instead, investors are actually buying more Treasuries.


Why?

For the answer just look at Treasury Secretary Jack Lew's performance on CNN's State of the Union:

CROWLEY: If I can just sort of sum up what you've been saying, and that is come October 17th, you have run out of tricks, although, you don't use that word, but ways that you can sort of massage the numbers to keep it going so that you don't go over the debt ceiling the Congress has set. You need a new debt ceiling by October 17th. What happens on October 18th if you don't get it?

LEW: Well, it's a very good question, Candy. And just to be clear, we crossed the debt limit in May. Since May, we've been creating some room to borrow by using what are called extraordinary measures. They've been used so many times. They're not as extraordinary as they used to be.

Tuesday I wrote to Congress saying I used my last extraordinary measures. I have no more. That means that on October 17th, we'll run out of the ability to borrow. We'll be left with some cash on hand. And, I've told Congress it will be roughly $30 billion.

And $30 billion is a lot of money. But when you think about the cash flow of the government of the United States, we have individual days when our negative or positive cash flow is 50 or $60 billion. So, $30 billion is not a responsible amount of cash to run the government on.

CROWLEY: -- where you're telling me that nothing would happen on the 18th?

LEW: Well, I can't tell you. We never got to this point, Candy, you know? We've never gotten to the point where the United States government has operated without the ability to borrow. It's very dangerous. It's reckless, because the reality is, there are no good choices if we run out of borrowing capacity and we run out of cash.

That will mean that the United States for the first time since 1789 would be not paying its bills, hurting the full faith in credit because of a political decision.

CROWLEY: Let me play you something that Congressman Steve King of Iowa, a Republican said, talking about the possibility of servicing the debt past this deadline.(BEGIN VIDEO CLIP)

REP. STEVE KING, (R) IOWA: I don't think the credit of the United States is going to be collapsed. I think that all this talk about a default has been a lot of demagoguery, a lot of false demagoguery.

(END VIDEO CLIP) CROWLEY: So, the question is, is it technically possible for you to keep up with your debts? Can you not just pay the interest rate on these debts while this is worked out?

LEW: Candy, I got to tell you that anyone who thinks that the United States government not paying its bills is anything less than default hasn't thought about it very clearly. Let me ask you a question. Let me ask you, what happens if we're not able to pay Social Security? What happens if we can't pay disability and veterans payments on time? Medicare and Medicaid. In each of these cases, it means these families, businesses, institutions that are important won't be getting what they're relying on --

CROWLEY: Coming on the 18th, you won't be able to pay Social Security, you won't be able to pay Medicare, you won't be able to pay all of these things?

LEW: I'm telling that you that on 17th we run out of our ability to borrow, and Congress is playing with fire. If they don't extend the debt limit, we have a very, very short window of time before those scenarios start to be played out.

CROWLEY: Could you keep up on servicing the debt, that is paying the interest on the U.S. debt, therefore, not defaulting as you contend?

LEW: Candy, if the United States government for the first time in its history chooses not to pay its bills on time, we will be in default. There is no option that prevents us from being in default if we don't have enough cash to pay our bills.

CROWLEY: But very often, in bills and correct me if I'm wrong, can you not pay the interest? I'm just trying to figure out wiggle room, because what Republicans are saying, is these guy do this all the time as we run up. Look at Wall Street. It's kind of looking at it. This doesn't seem to be that big of a deal this time around.

No one's been threatening to downgrade the U.S. credit worthiness. So, the question is, is it true, as they say, that you can service the debt beyond the 17th?

LEW: Candy, let me put this in context. We are the strongest, most important economy in the world. We've already seen that when government shutdown, the kinds of gridlock and brinksmanship in Washington hurts people and it hurts the economy. We saw it in 2011. What happened is we approach the point of reaching the debt limit.

You now have people who are saying, oh, it won't be that bad. Well, I challenge them to answer the questions that I asked you. They're willing to concede if we don't pay interest and principal on the debt if that's bad. Well, you know, it is bad, but there are a lot of things that are bad. You can't pay all the bills if Congress doesn't raise the debt ceiling. And none of these bills are new. These are commitment that Congress made that's paying old bills. It would be like somebody saying I ran up my credit card and I decided not to pay it. You can't do that. The United States government is just too important to the world. Our currency is the world's reserve currency.

At no point does Lew ever say that he, as Treasury Secretary, will not be able to make all of the U.S. government's interest payments on time. Instead, Lew equivocates between bond payments and all other U.S. financial obligations, insisting that both are tantamount to default.

But bond holders, and markets, see it differently. There is a qualitative and legal difference between not making a bond payment and not making a Social Security payment. The former is a legally binding contractual obligation backed by the U.S. Constitution. The latter is a non-legally binding promise to pay that Congress has the legal right to change at anytime, for any reason.

That does not mean missing Social Security and Medicare payments will be harmless. Disruptions to those programs would have a negative economic impact. Just as the government shutdown is having a negative economic impact.

But just as President Obama is very deliberately and politically choosing who to hurt during the government shutdown (see the selective and punitive closures of federal property), Obama will also selectively and punitively choose which bills to pay if the debt limit is not raised.


Conn Carroll

Conn Carroll is editor of Townhall Magazine.

Author Photo credit: Jensen Sutta Photography