Although both the Republicans and the Democrats warn darkly of a U.S. debt default, the truth is there is absolutely no reason it will happen. Even if the two sides never agree on a compromise solution, President Obama has at least three ways to avoid a default.
First, the Treasury Department has the right to mint coins. They could strike a $1 trillion coin – in palladium would be a nice touch – and deposit it in the bank. Problem solved. Maybe strike two coins, and more than cover this year's deficit.
Second, he can cite the 14th Amendment that the validity of U.S. government debt may not be questioned, and just keep selling T-bills and T-bonds. Let the Republicans sue him if they want to, as it would take years to wind that case through the courts.
Third, the Federal Reserve can cancel the $1.6 trillion of U.S. Treasury debt that it holds. The government pays interest on this debt to the Fed, which then rebates almost all of the interest to Treasury at the end of the year. Why?
President Obama has used the debt “crisis” to frighten seniors that they might not get their Social Security checks. The Republicans have used the debt “crises” to help the voters forget who voted all these programs and tax cuts into law, thus creating the problem. As House Majority Leader John Boehner (NYSE:R) said of his compromise bill today: “This is the best opportunity we have to hold the President’s feet to the fire.” He did not say: “This is the best opportunity we have to raise the debt ceiling,” or “This is the best opportunity we have to address the biggest underlying problem of job creation.” It's clear where his priorities lie.
The underlying question is why President Obama is letting this play out. My suspicion is that he wants to get Federal spending under control, but wants to be able to blame the Republicans for the negative political or economic fallout. It looks like the U.S. is about to make the European/IMF mistake of implementing austerity in a no-growth economy, so there should be plenty of negative economic fallout in 2012.
Or maybe Josh Brown of The Reformed Broker is right – when a crazy man gets in a staring contest with a weakling, the crazy man wins.
A pox on all of them.
Just remember that the more real and immediate austerity that comes out of this process, the more certain it is that there will be a recession in 2012.