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Post Partisan
Posted at 12:15 PM ET, 07/14/2011

Danger of default: Bachmann and Palin don’t get it


Please ignore the nonsense coming from Rep. Michele Bachmann (R-Minn.) and a certain celebrity who served two years as governor of Alaska before becoming a best-selling author and reality television star. And please pay attention to how the bond ratings agencies are reacting to the inability of “leaders” in Washington to come to an agreement on lifting the nation’s debt ceiling. This is not a game, folks.

Yesterday, Moody’s put the United States on notice. Our credit rating is under review. A downgrade from AAA to AA is possible. I pointed out the scariness of this possibility earlier in the day yesterday. The CliffsNotes version: the potential loss of 1 million jobs. But Moody’s said something else that shouldn’t get lost.

If the debt limit is raised again and a default avoided, the Aaa rating would likely be confirmed. However, the outlook assigned at that time to the government bond rating would very likely be changed to negative at the conclusion of the review unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction.

Even if default is avoided and the AAA rating remains unchanged, a credible long-term deficit reduction agreement is needed to keep Moody’s from slapping a “negative” outlook on that rating. This means the cynical escape hatch offered by Senate Minority Leader Mitch McConnell (R-Ky.) would not impress Moody’s in the slightest if it were adopted.

Meanwhile, the Wall Street Journal reports today that a top Standard & Poor’s official told Senate Democrats and industry leaders that a ratings downgrade could come even if interest payments are met after Aug. 2.

John Chambers, an S&P managing director, told top Senate Democrats and officials from U.S. Chamber of Commerce and the Financial Services Forum trade group that U.S. debt could be downgraded even before the government misses an interest payment, people who attended the meeting said. He said this could occur if the U.S. began skipping payments to other creditors, such as veterans or vendors, which would throw into question its ability to meet its obligations.


This is why the Republican argument that the Treasury could prioritize its payments in the event of a default is an empty one. Under normal circumstances, robbing Peter to pay Paul doesn’t inspire market confidence. Imagine the reaction if the United States is forced to do it for the first time in its history. This much I do know, the American people won’t like it.

What could befall the United States if one isn’t reached will be unprecedented and unpredictable. The Bipartisan Policy Center puts it all in vivid color in its “Debt Limit Analysis.”  Remember, in the month of August, the federal government will have $172 billion in hand, but $306 billion in expenses. Coming up with the remaining $134 billion for the month will require some truly tough choices. Here’s one scenario BPC presents.


“If you choose to pay...”


“Then you can’t fund these programs, worth $134 billion”

Those who say President Obama engaged in scare tactics when he told CBS Evening News anchor Scott Pelley that he couldn’t guarantee that Social Security checks would go out on Aug. 3 need to take a look at the chart below. It’s not a scare tactic. It’s the scary truth.

“Treasury Cash Flow: Wednesday August 3rd, 2011”

On Aug. 3, Treasury will take in $12 billion. But it will have $32 billion in expenses with the 25 million Social Security checks totalling $23 billion due out that day making up about 72 percent of the total. As The Post reports today, “Obama could decide to pay half of the Social Security checks and ignore other bills coming due that day....Or he could decide not to make any Social Security payments and instead hoard tax revenues to pay investors in U.S. bonds.”

The president would face an unenviable task of picking winners and losers if the nation defaults. But we’ll all be losers if it gets to that point. So, while the Republicans hunt for ways to avoid blame if the nation skids off the rails, they won’t be able to escape the wrath of the electorate any more than Obama will when the impact of those horrible decisions are felt almost overnight.

By  |  12:15 PM ET, 07/14/2011

 
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