Caller: Hope and change. I think I remember those words. Anyway, can you run me the numbers on the default scenario?
CA: Between August 3 and August 31, Treasury is supposed to collect $172 billion and pay out $307 billion. That $172 billion can cover the bondholders, Social Security, Medicare/Medicaid, defense vendors, and jobless benefits. If you pay all those, there’s nothing left for active-duty pay ($2.9 billion) or a wide array of other obligations.
Caller: Like what?
CA: Federal salaries, veterans’ programs, Pell Grants, and special-education grants to the states, food stamps, and aid to poor women and children.
Caller: Can we squeak by for a while?
CA: On August 3, revenues are projected to be $12 billion and obligations $32 billion, including $23 billion in Social Security benefits and $2.2 billion in Medicare/Medicaid payments.
Caller: So we’re in a big hole right off the bat.
CA: Yep. Those payments will be delayed, not canceled. But revenue flows and obligation deadlines are uneven. That will cause doubt among beneficiaries and deep uncertainty in the bond markets.
Caller: Why?
CA: Because Treasury has $470 billion in securities that mature in August. It has to cover principal and interest. Typically, Treasury does that by issuing new bonds. But in a scary default market, buyers will demand higher interest rates. Meanwhile, the nation’s AAA credit rating would be downgraded and higher interest rates and greater stock market volatility would ensue.
Caller: This all makes me feel weak.
CA: Well, that’s a start.
Caller: What can you possibly mean by that?
CA: Abraham Erskine, the doctor who helped create me, chose me because I was weak but knew right from wrong, knew how to meet tough challenges head-on. “A weak man knows the value of strength, the value of power,” he told me.
Caller: What good does that do me? I don’t have a vote in Congress.
CA: You don’t think the specter of default has begun to make the barons in Congress feel weak? It has. And that may be the beginning of understanding the value of strength, the value of power.
This article appears in the July 27, 2011, edition of National Journal Daily.
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