FedUpUSA

Alan Greenspan On The Debt Ceiling

Alan Greenspan spoke to Maria Bartiromo on CNBC today.  Among other things, he stated that failure to raise the debt ceiling does NOT result in a default.   In other words, we have sufficient revenues to roll the existing debt and pay the interest thereon.
OK, I didn’t know he was going to say that when I wrote this morning:
The government borrows about 40 cents of every dollar it spends at present.  This means two things:
  • There is more than enough money coming in to pay the debt and interest that matures. Therefore, a default would be an intentional act by Tim Geithner, much as it is when you decide not to pay your mortgage (despite having the money to do so.)  Selective default is a choice, but it is a freely-entered into choice. What Geithner is doing is threatening an intentional, strategic default if he doesn’t get his (and Obama’s) way.
  • If the government does not get its debt increase it must immediately balance the budget. This is good, not bad, in the intermediate and longer term.
The problem is that this situation also exposes the truth, which nobody wants to face in Congress: Whether you raise taxes or cut spending the economic impact is the same – 12% of GDP disappears.
Greenspan was also pessimistic about the U.S. deficit talks, saying he didn’t think Congress would reach an agreement on raising the debt ceiling by the Aug 2 deadline.
“We’re going to get up to Aug 2 and I think on that night, we are not going to have the issue solved,” he said.
If that happens, he said, the U.S. would have to continue paying debt holders or risk major damage in global financial markets. As a result, “we will default on everything else.”
That’s right – we have the money to pay the debt holders.  What we can’t do is pay everything else, which means we won’t.
He was also quite negative on QE2 (and QE1), basically saying both were simple dollar-destroyers.  Gee, Alan, you came to your senses on what actually happened?
And incidentally, not raising the debt ceiling is not a Constitutional issue, despite the screaming harpies on the left.  The Constitution’s 14th Amendment provides that issued debt is not to be questioned.  A political promise to spend money in the future is not a debt.
Finally, he hits on the fact that Greece is not fixed, that a default is essentially certain in some form (either directly or via some sort of fiscal consolidation) and that they’re basically playing games over in Europe rather than addressing the actual issues.  As I have repeatedly said the next shock will almost-certainly not come from the US – it will originate “over there.”
Watch the CNBC Greenspan interview in full here; I can’t believe I heard mostly common sense out of him today…. but I did.
The Market-Ticker
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