America hit its self-imposed debt ceiling two weeks ago, and the Treasury will run out of cash by about Feb. 15 unless the limit is raised.
What do we do about it? There seem to be two camps.
One says: "My gosh, of course it should be raised -- why are we even talking about this? The thought of voluntarily defaulting on the national debt is unfathomable!"
The other group says, "Whoa, whoa, whoa! No one is talking about defaulting on the debt. Not raising the debt ceiling would just force the government to spend within its means. Payments could be prioritized so that vital spending commitments -- notably, interest on the national debt -- are paid first and default is avoided."
Congresswoman Michele Bachmann noted during the debt ceiling debate in 2011:
This is a misnomer that I believe that the president and the Treasury Secretary have been trying to pass off on the American people, and it is this -- that if Congress fails to raise the debt ceiling, that somehow the United States will go into default and we will lose the full faith and credit of the United States. That is simply not true. ... It is important to recognize that revenues continue to come in to the United States Treasury. It is merely the president's obligation, and the Congress', to make sure that the interest is paid on the debt. We are grateful that revenues are sufficient to be able to pay the interest on the debt.
This seems logical, and it's mostly right. But it's just flawed enough to be utterly, disastrously, wrong.
The government does indeed take in enough in tax revenue to cover interest payments on the national debt -- by a factor of 11. Interest payments as a percentage of GDP are actually near the lowest level in 40 years.
But the government is not like a household that receives a fixed paycheck every other Friday and pays a set mortgage payment on the first of the month. Tax revenue and expenses are lumpy, coming and going in sporadic amounts.
That's an incredibly important distinction to make. Because while it's true that on an annual basis the government takes in enough to cover interest payments, it's decidedly not true on a month-by-month, week-by-week, day-by-day basis.
Using daily and monthly cash-flow statements, the Bipartisan Policy Center put together a projection of the Treasury's income and expenses on Feb. 15:
So, on its first day with no excess cash on hand, the Treasury is projected to receive $9 billion in tax receipts and owe a $30 billion interest payment.
Let that sink in for a moment.
Even if we shut down the FBI, close all Federal courts, lay off all Federal workers, suspend all Social Security payments, and stop paying soldiers, the Treasury still wouldn't have enough money to make its Feb. 15 interest payment.
It is a debt default.
The Treasury is expected to bring in $40 billion of tax revenue from Feb. 19 to Feb. 21, and it could make its interest payment then -- but not after being in default for four business days. What would happen to financial markets during those four days as the full faith and credit of the United States goes up in smoke? I don't want to find out, and you shouldn't, either. It's absolutely mad that we're considering it.
The risk of defaulting by not raising the debt ceiling is so real that it actually makes me optimistic. According to Politico, Congressman Jason Chaffetz warns that "lawmakers are prepared to shut things down or even default if Obama doesn't bend on spending." But we've seen this before, in both last summer's debt ceiling debate and the more recent fiscal-cliff negotiations. Both parties threaten each other and draw lines in the sand, the Dow falls 800 points as investors get nervous, legislators suddenly realize they need to get serious, and a deal comes at the last moment. The consequences of default are so serious and would clobber so many that I can't believe Congress would allow it. With stocks at five-year highs and interest rates still near historic lows, markets aren't too concerned, either.
As Warren Buffett put it, "The rest of the world may think we're idiotic at times, but they don't think we're going to commit suicide."
For now, at least.
The article Why Feb. 15 Could Be the Most Important Day in Market History originally appeared on Fool.com.Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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