There’s a lot of fuss about the U.S. debt ceiling this week, including fears that the Treasury could “default” on its debt. Is the government going to go the route of so many hard-luck Americans during this downturn and just stop paying the bills?
As economist Ed Yardini wrote this week, the U.S. Treasury can still auction new securities to raise funds. And according to Yardini’s math, net interest expenses by the Federal government were $213 billion through the last 12 months that ended in April, while Treasury revenue totaled ten times that. Specifically, the last 12 months saw $2.27 trillion in revenues for the Treasury – including nearly $290 billion in April alone due to tax season.
In short, the only way the government will default on its debt is if it chooses to and current scare tactics are pure politicking.
That said, just because the Treasury can easily cover debt interest doesn’t mean the rest of our spending isn’t a big problem. And just because we won’t suffer the world’s ire for defaulting on our debts doesn’t mean the global economy isn’t going to exact a severe toll on America for recent policy missteps.
So forget about the debt ceiling: Here are 3 very real problems all investors and taxpayers should be worried about.
1. The Government Can Steal from Social Security and Medicare
There is talk about how the Treasury is now raiding the coffers of government programs to bridge its spending gap until Congress approves a higher debt ceiling. In a letter full of political bluster on Monday, Treasury Secretary Timothy Geithner announced he would tap into two government employee pension funds to free up cash.
As discussed, this isn’t necessary – just a political trick. But thanks to this mayhem, one of the government’s ugliest sins is now front and center in the media. Namely, the ability to steal from programs with a surplus to sate its spending appetite.
And by programs, I mean Social Security and Medicare.
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While it’s true Social Security and Medicare technically have a “surplus” in their trust funds that will cover payments for decades to come – recent estimates are 2036 for Social Security and 2024 for Medicare – the raid on the pension programs shows that your retirement funds from Uncle Sam may not be as secure as you think.
If the Treasury has the ability to steal from pension programs, who cares how much of a “surplus” entitlements have socked away if they too are subject to Uncle Sam’s sticky fingers? When it comes time to break open the piggy bank and there’s nothing but IOUs inside, where will the money come from to pay for the food an electricity of America’s seniors?