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Chart: Why Default Won't Happen

Default won't happen.

This chart shows why the U.S. Government will not default on its debt, should it hit the statutory debt limit set by Congress (a limit that the Treasury Deparment suggests may be reached later this month).

Why Default Won't Happen


(Click on image to see larger version.)

Look at the red spending bar.

Zero in on the small section at the far left, marked "Interest on Debt."

Now compare it to the entire green tax revenue bar above it, marked "Income."

The two bars aren't even close in length.

Uncle Sam takes in vastly more money each day than he needs to pay principal and interest on U.S. government bonds.

That's what a "default" is -- failing to pay your creditors on time.

Were we to arrive at "X day," meaning the day when the statutory debt limit is reached and the president can no longer legally borrow on the credit of the United States, the president would not default.

Rather, he would be forced to decide whom to pay first, and whom to pay later when sufficient funds become available. This is called prioritization.

No statute bars the president from prioritizing holders of U.S. government bonds over others to whom the government also has financial obligations. Some lawyers contend that the U.S. Constitution actually requires him to do so (14th Amendment, section 4). 

Regardless of the law, every president, including the current one, when the question comes up, swears publicly never to do anything that would diminish the "full faith and credit" of the United States.

This term, "full faith and credit," is important, and, at the risk of boring the reader, I want to explain why.

"Full faith and credit" is a term of art, with a specific meaning. "Faith" is a word from the world of contracts. It means "keeping your promises."  "Credit" is a word from the world of finance. It means "having a reputation for always repaying your debts to creditors, on time, in full, without fail." Creditors are people who have lent you money. Even the seemingly minor words "full" and "and" in the phrase are important: they narrow its meaning.

The precise meaning of the phrase is: "always paying back those who have lent you money, on time, in full, according to the terms of the contract, without fail."

It does not mean: "always paying your bills on time -- any kind of bill."

The key element in the definition is "those who have lent you money." 

Another clue that the term has the more narrow meaning I've given is that we don't often hear it used outside the context of government debt. We don't hear people talk about the full faith and credit of BankAmerica, or of Joe Citizen. We do hear about the full faith and credit of the United States.

That may be because governments are held to a higher standard than other kinds of debtors, and rightly so. They have the power to tax -- to take their citizens' or subjects' money by force. Governments don't have a good excuse for missing payments to their creditors.

When someone purchases a U.S. government bond, he is lending money to the U.S. government. The "full faith and credit of the United States" means Uncle Sam's reputation for always paying promised principal and interest to holders of bonds that it has sold to them. It doesn't refer to Uncle Sam's reputation for paying others to whom he may owe money. 

While other kinds of government payments -- paychecks, benefit checks, reimbursements, financial grants of various kinds -- may be subject to the terms of a contract and thus matters of "faith," they are never matters of "credit." 

Okay, now that we've beat that dead horse into the ground, let's finish off the "default" canard by challenging ourselves with an example. Let's take the politically hardest example we can think of: Social Security.

What if Social Security checks don't go out on time, as scheduled? Is that a default No.

Social Security is paid out monthly, usually transferred electronically to retirees' bank accounts. Most Social Security payments are made on the second, third, and fourth Wednesday of each month. Let's say we hit the debt ceiling on the second Monday of the month, and, come Wednesday, the president runs short of cash and finds he can't make the regular Social Security payout. What does he do? He has no choice. He can't pay it. So he has to postpone it for, let's say, one week, due to lack of sufficient funds.

(This is very unlikely to happen, by the way. Look at the chart again.)

In this, the "worst of all possible scenarios," retirees will be inconvenienced, to be sure -- some, severely. Doubtless many will cry, "Breach of faith!" But none could truthfully cry, "Default!"

Remember, "default" is when you fail to pay your creditors. Uncle Sam will keep doing so, no matter what. 

Markets don't much care about the government's "debts" to retirees. They do care a lot about its debts to creditors.

Those who warn of a "default" "rattling" markets and possibly causing "economic Armageddon" are either confused or consciously trying to confuse.

Yeah, you may say. But what about market volatility? Just talking about "going past X day" will "rattle" markets, and perhaps even trigger a recession!

Maybe, maybe not.

Uncle Sam has a perfect record when it comes to debt service. He has never yet missed an interest payment on U.S. government bonds.

(Okay, he did once, unavoidably, in 1979, due to a computer error, but the amount was so small and the delay so brief that it had no discernible effect.)

But Uncle Sam has missed other kinds of payments. Many times. And the world did not end.

Has the IRS ever been late in sending you your tax refund?

Has Medicare ever been late in reimbursing a doctor or hospital? 

Of course!

No serious observer regards those kinds of delays as "defaults."

Delaying tens of billions in Social Security benefits would not rattle financial markets one-tenth as much as would a failure to make a tiny, legally obligatory interest payment on a series of U.S. Government bonds.

Why is every president so determined to avert a true default? Because no president wants to be the first to ruin our nation's perfect repayment record. It would reflect very negatively on his performance as president. It would be a black mark on his legacy. 

In the event the president does run out of borrowing headroom, he will prioritize.

Default won't happen.

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[Update: October 9: Moody's, one of the main independent credit rating agencies that determine whether a government is in "default," confirms that default won't happen.]

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[Image by Matt Battaglia, FreedomWorks Creative Manager, October 7, 2013.]

(For a PDF version of the chart, click on the link at the bottom of this page.)


Debt Ceiling: Resources for Activists and Journalists

Chart: Why Default Won't Happen

Obama's Debt Claims Debunked

Get Rid of the Debt Ceiling

Don MacDermid

Dec. 2008 CPI = 215.30 is 225.87 for 2012 Dec - increase is 4.48%
Hum-event listed 2008 spending at $2.9 trillion & 2012 spending at 3.54 trillion...up 22.07%
2012 spending @ CPI would be $3.03 trillion
your $2.988 revenue is within $42 billion of that $3.03 cpi number

CPI is obviously cooked & the built in 6% or so per year to the continuing resolutions are numbers from the air.

All of the garbage in 2009 (Frank/Dodd bank collapse, bailouts, wars, etc.) are gone... so how does anyone have a real budget with checks & balances, due process, internal control, accountability, etc? There is NONE! A president who starts war on his own, funds terrorists, gives money like it grows on trees, creates limitless czar dynasties who answer to only him, etc do it without going to jail??? Misuses of public money - government or corporate are widely prosecuted crimes in the public state-local, and private - corporate sectors. There's no written law denying citizens or various government entities the right to remedy. Articles 4, 5, 6, & 7 haven't been amended!

300 million citizens can overwhelm traitors like Holder and Obama in a heart beat is we start using the Constitution and written law instead of listening to lying thieving traitors! RECALL & PROSECUTION WORKS!

stonestone's picture
stone stone

Yep- no default. Why? Because sanity ruled the day and the GOP's weird and immature tactics failed.

Jim Bello

Prioritization! There lies the problem for all of this. The President, the House and the Senate don't have the guts to sit down and rank every spending program in the Federal Government 1through 15,000 or whatever.

You only have so much money to use and when you have spent it all every program below that line should be axed. Guess what? Probably 40% or more of these programs should be gone!

Ex-Mil-Spec's picture
Maximum Sebastian

But where are my manners!?! Thanks for the posting Dean, and the illustrative chart Matt. They both helped clarify and definitively explain an otherwise ether-open-to-interpretation issue ( you've just made me use up ALL my $5 words for the day!!).

Ex-Mil-Spec's picture
Maximum Sebastian

That chill in the air denotes more than the approach of fall kids. A country thrown into financial and economic chaos is ripe for 'emergency decrees' to 'correct' the situation. This rehetoric match the administration is dangling over the powder keg of public misconseptions in a sluggish economy is yet another option to trigger a 'crisis that you don't let go to waste' to grab and sustain even more federal power. For all our sakes...I hope I'm just whistling past the graveyard here.

Press Watchusa


Seth Schroeder

No the Tea Party anarchists are driving the economy into default to defeat his agenda.

No, seriously, he probably will force a default and blame on the Republicans. It's a lose-lose situation for them.

m2foster's picture
Monalisa Foster

You're assuming that this president will uphold the Constitution. He's shown he's more than willing to ignore and violate the constitution when it suits him. What makes you think it's NOT part of his plan to diminish the full faith and credit of the US? He's managed to diminish US power in the eyes of the world. Isn't he the one always saying we need to be cut down to size so we can learn what the rest of the world feels like?

Seth Schroeder

The President is already violating the constitution by borrowing money on credit of the United States. He ought to be impeach prosecuted, and put in prison for the rest of his miserable life.