As our befuddled and recalcitrant Congress and President move us ever closer to the abyss of default, we are beginning to hear the Administration’s payment plan if the debt ceiling is not raised by next Tuesday, August 2.
All we know for sure as of this writing is that the Administration plans to pay bondholders before everyone else. The mainstream news media is assuring us that no matter who does not get paid—employees, social security recipients, contractors—that that bond holders must be paid off.
To be sure, if we don’t pay foreign holders of our debt such as the Chinese government, we will ruin our financial rating, interest rates will soar and our reputation across the globe will take the kind of hit associated with starting useless wars, as what happened in 2003 when we invaded Iraq for no real reason.
We need to keep in mind that one of the biggest holders of U.S. debt is the Social Security Trust Fund. In a sense, the Trust fund holds bonds collectively for everyone who pays Social Security taxes, and not to pay this debt is no different from reneging on interest and principal payments on T-bills. Besides putting millions of senior citizens at risk, not paying or postponing Social Security payments will likely have the same impact on credit ratings, interest rates and world markets, plus foment social unrest at home.
From the reports I’ve read, the Administration seems to be using a blunt instrument to chisel out a plan. Perhaps it should consider taking a more surgical approach by not looking at classes of creditors, but instead going into each class and making rational priorities. For example, some bondholders are foreign persons or entities and others are American.
Here then is my modest proposal for disbursing what government funds we will have available is the debt ceiling is not raised. It’s going to be easier to list who should not be paid:
- Do not pay the salaries of any federal government employee who makes more than $125,000 per year (or drop it to $100,000).
- Do not pay the salaries or benefits of any elected U.S. official, including president, vice president, congressional representatives and senators.
- Do not pay any military contractor, but continue paying the salaries of soldiers (making less than $125,000 or $100,000).
- Do not pay the interest or principal to any American citizen or company that holds bonds, or to any foreign entity that is controlled by Americans. The idea here is that foreign creditors must take precedence to limit the damage to both the U.S. economy and global economy.
- Do not pay agricultural subsidies.
This plan won’t stop the inevitable stock market plunge, and it won’t stop the leap in interest rates that’s going to occur. But I think it will limit the human damage, and make sure that those who suffer the most are the ones who have been taking the most out of the system.
Whatever the plan, not paying our obligations will plunge our economy into a death spiral that will be hard to stop or contain. But Congress can’t seem to focus on that likely outcome, which should override any ideological imperative.
At this point, our best hope is that our President summons up the courage to declare a state of emergency and unilaterally raise the debt ceiling to a level that postpones the next debt ceiling crisis until after the election.