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Moody's Says Failure To Raise Debt Limit Does Not Mean Default As Jack Lew Pleads To "Honor Our Obligations"

In an op-ed released today in the USA Today, the US Treasury Secretary takes his appeal to raise the U.S. debt target once again, this time to the $19.6 trillion number disclosed here previously, by pointing fingers at "some in Congress" who "are endangering this progress by once again manufacturing a crisis for our country. By waiting to the last minute to act on the debt limit, Congress could cause a terrible accident. This is not an abstraction; failure to raise the debt limit would mean devastating impacts for taxpayers, consumers and businesses."

The reason for his hyperventilation is that the US is within either days until the Treasury runs out of borrowing authority on Nov. 3.

Increasing the debt limit does not authorize future spending or fund new programs — it merely enables us to pay the obligations that Congress has already incurred. This includes paying the salaries of our troops, providing benefits to veterans and Social Security recipients, and reimbursing hospitals for taking care of the sick. One former Republican governor likened refusing to raise the debt limit to eating a meal and leaving a restaurant without paying. In this case, the full faith and credit of the United States is at stake.

Not really.

In a report released earlier today, rating agency Moody's (the one that did not downgrade the US in August 2011 and saved itself a lawsuit by Tim Geithner unlike the less lucky S&P), reported that "failure to raise the US government's (Aaa stable) statutory debt limit before the Treasury has exhausted the "extraordinary measures" that it is using to fund the government's spending, does not mean that the US is about to default on its debt, Moody's Investors Service says."

As Bloomberg reported, Moody's - like Jack Lew - expects that an agreement to raise the debt limit will be in place before the measures are exhausted, and if not by then, certainly before November 15, when the Treasury is scheduled to make interests payments of $35 billion. "If an agreement is still not in place by this time, the government could delay other expenditures to ensure it has enough cash to pay bondholders."

"Even if the debt limit is not raised, we believe the government will order its payment priorities to allow the Treasury to continue servicing its debt obligations," says Moody's Senior Vice President Steven Hess.

This is called prioritization, and is something that Jack forgot to mention in his op-ed. Of course, it means that while funding existing U.S. debt obligations, the US government would have to drastically shrink its unlimited spending budget.

By how much?

"In the unlikely event that an agreement is not reached, Moody's estimates that total government expenditures would have to be reduced by an average of 11 percent during the fiscal year 2016, so that it can run a balanced cash position. However, on a month-to-month basis, the pattern of revenues and expenditures varies considerably, with five months of the year recording surpluses, while the other months are in deficit. November typically records a fairly large deficit, meaning that during that month expenditures would have to be cut by a larger percentage."

Which, of course, is the real reason for the panic, because without a debt ceiling hike while the US will most certainly not default on its debt, it will have no choice but to dramatically reduce its spending, leading to an unprecedented contraction in the U.S. government, which is unthinkable to Jack Lew... or the Military-Industrial Complex - after all, someone has to create those middle-eastern regional wars, and someone has to pay the Lockheeds and General Dynamics for the privilege of "defending democracy" around the globe. 

Meanwhile, while the outcome of this "manufactured crisis" is well-known, for now the Bills market is still nervous as can be seen by the yield differential for yields maturing before and after the D-Day.


Finally, as to Jack Lew's plea for the US to "honor its obligations", perhaps one can ask if that means actually paying down debt without rolling it into even more debt due even further in the future.