|July 8, 2011
You may have noticed that I haven’t been paying much attention to the possibility of default via the legislative vector. The reason is because every time a situation like this comes up, the machine always somehow manages to lurch on to dig the hole deeper. I’m assuming that the same thing will happen this time.
My guess is that, if the risk of default was real, the dollar and the precious metals would not be rangebound, as they are now. These will be worth watching, perhaps a bit more closely than usual, over the next few weeks.
As of now, I’m assuming that no default will occur, regardless of what Congress does or doesn’t do. The United States is a banana republic with nuclear weapons. Anything goes: “The United States is formally in an ongoing limited state of emergency declared by several Presidents for several reasons.” A default would make the antics of 2008 look like a walk in the park, so if the machine was actually about to go off the rails, my guess is that there’s some clause or another in that morass of emergency declarations that would allow the regime to buy another few weeks or months—until the next crisis hits.
A small team of Treasury officials is discussing options to stave off default if Congress fails to raise the country’s borrowing limit by an August 2 deadline, sources familiar with the matter said on Wednesday.
Senior officials, including Treasury Secretary Timothy Geithner, have repeatedly said there are no contingency plans if lawmakers do not give the U.S. government the authority to borrow more money.
But behind the scenes, top Treasury officials have been exploring ways to prevent a financial meltdown that would be triggered if the government were unable to pay its bills on time, sources told Reuters.
Treasury has studied the following issues:
- Whether the administration can delay payments to try to manage cash flows after August 2
- If the U.S. Constitution allows President Barack Obama to ignore Congress and the government to continue to issue debt
- Whether a 1985 finding by a government watchdog gives the government legal authority to prioritize payments.
The Treasury team has also spoken to the Federal Reserve about how the central bank — specifically the New York Federal Reserve Bank — would operate as Treasury’s broker in the markets if a deal to raise the United States’ $14.3 trillion borrowing cap is not reached on time.
The U.S. government currently borrows about $125 billion each month. The Obama administration wants Congress to raise the limit by more than $2 trillion to meet the country’s borrowing needs through the 2012 presidential election.
Research Credit: ms