Tue July 26, 2011
Revisiting That Default Deadline: Could Extra Tax Revenue Buy A Little Time?
For weeks now, President Obama and the Treasury have fixated on an Aug. 2 deadline at which, they say, the United States will not be able to meet its financial obligations and would default for the first time in history.
Well, Zachary Goldfarb of The Washington Post has an interesting piece today that questions that hard and fast date. He writes that tax receipts have been higher than anticipated and that could mean politicians might have a few more days to come to an agreement:
As of Friday, according to the Treasury, the government had $85 billion in cash.
UBS estimates that the government will run out of money to pay all bills starting no sooner than Aug. 8. Barclays suggests Aug. 10. Wells Fargo Securities said the government might have to cut back on some spending but could pay most of its bill through August.
"If policymakers are truly falling short by just a few days on a big agreement, they now seem to have an extra week or so," said Barclays analysts, led by senior debt strategist Ajay Rajadhyaksha.
Goldfarb also spoke to Morning Edition host Steve Inskeep and he made the point that what the Treasury if facing is a cash flow issue. He said taxes can pay for about 60 percent of the government's expenses, so with an unexpected bump in revenues, the government can chug along for a few more days or even weeks, but one thing is for sure: At some point it will run out of money and it will need to take on more debt.
If it doesn't, said Golfarb, it means the government will have to cut 40 percent of its spending.
"Even a 40 percent reduction would have a huge impact on our economy," said Goldfarb. "It would cut about 10 percent of our economy and lead to a second recession."
Another interesting thing that Goldfarb's observations bring up is the amount of uncertainty in this debate. So, let's say Washington doesn't wrap up negotiations by Aug. 2.
On Aug. 4, the country faces two other major milestones that are written in stone: It has to pay back $100 billion in debt and will resell that same amount in Treasury securities. The big question is if credit agencies lower the United States triple-A rating — which is almost as good as cash — would central banks still line up to buy U.S. Treasury securities? With Japan in crisis and Europe struggling, the U.S. still looks like a pretty good bet and the market is the one that sets interest rates.
The problem, said Goldfarb, is that we don't know. We also don't know how the markets would react to the U.S. walking over that Aug. 2 deadline.
"We don't know exactly what [could] happen," said Goldfarb. "It's unprecedented."