During an interview the other day, economist and CNBC host Larry Kudlow, warned me that failing to raise the debt ceiling would be a “catastrophe”.
But Andrew Moylan, a vice president for The National Taxpayers Union (NTU) disagrees, telling me that failing to raise the debt ceiling would merely trigger a 10-12 week period where “extraordinary measures” could be taken by the Treasury Department to “shift things around.”
(In essence, the argument is that reaching the debt limit does not equal defaulting on our debt — a point perhaps most famously made by Pennsylvania Sen. Pat Toomey.)
You might be wondering what happens once those “extraordianary measures” Moylan mentioned are played out. According to Moylan: “We still easily have enough to continue to pay interest payments. We would then only be limited by what we could spend by the amount of revenue coming in. So we’re talking about, of course, very large cuts in discretionary spending — but we’re not talking about default on the debt.”
Moylan is not alone in this thinking. Americans for Prosperity’s James Valvo recently echoed this viewpoint, writing that, “The U.S. Treasury already possesses the discretionary authority to make debt payments first and they would almost certainly do so.”
The only way we could actually go into default, Moylan tells me, is if Treasury Secretary Tim Geithner chooses to make that happen. “If he chooses not to write the checks, we will go into default,” Moylan warns.
The good news is that Sen. Toomey has authored legislation which would “require the Treasury to make interest payments on our debt its first priority in the event that the debt ceiling is not raised.”
But even if Toomey, Moylan and Valvo are all correct — there is another potential problem that is hard to game. How might the markets react if Congress were to vote against raising the debt ceiling?
Markets abhor uncertainty, and it’s entirely possible there would be psychological ramifications. In fact, Senator Toomey’s letter to Geithner warned that conflating the debt ceiling with default might actually “undermine investor confidence in the U.S. government’s debt…”
On the other hand, Moylan tells me: “We have exceeded the debt ceiling in the past and the market hasn’t flipped out.”