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Mar 04, 2015

Time to Take Default Off the Table

The United States now staggers under $18 trillion of debt, including nearly $7 ½ trillion run up by this administration.  The interest on that debt is the fastest growing component of the federal budget. 

The debt limit is how our government regulates how much it borrows and assures that elected officials are accountable for that borrowing. 

As the national equivalent of a credit card limit, the Treasury can borrow no more than authorized by Congress.  When it becomes necessary to adjust that limit, Congress also has the duty to review and revise the policies that are driving that debt. 

The fundamental problem, under both Democratic and Republican Congresses, is that this process requires difficult choices and is fraught with controversy.  The bigger the debt, the bigger the controversy.  The bigger the controversy, the greater the chance for an impasse, and the more likely that creditors will be spooked into demanding higher interest payments to cover their greater risk.

Given the unprecedented debt our nation owes, rising interest costs could quickly spiral out of control and precipitate a debt crisis that would devastate our nation for generations.   

In 2013, the House passed HR 807 to guarantee that the sovereign debt of the United States Government will be paid in full and on time, under any circumstances -- even total political gridlock.  It stalled in the Senate.

This week, I reintroduced it as HR 692, the “Default Prevention Act” with 43 House co-sponsors.

It simply provides that if the debt limit is reached, the Treasury Secretary may continue to borrow above that limit for the sole purpose of paying principal and interest.  It is an absolute guarantee that the debt of the United States, including that held by the Social Security trust funds, will be honored.

Congress is again approaching the limit of the government’s current borrowing authority.  It must soon have serious discussions over the level of our debt and what additional measures can be taken to bring that debt under control.  We all hope these discussions will go smoothly, but we all know that sometimes they do not.

The Default Prevention Act says loudly and clearly to the world that no matter how much Congress and the President may differ and quarrel, the sovereign debt of the United States is guaranteed and loans to its government are absolutely safe.

Most states have laws to guarantee re-payment of their debt.  Three years ago, in testimony to the Senate, former Federal Reserve Chairman Ben Bernanke credited these provisions with maintaining confidence in state bonds. 

Congressional Democrats opposed this reform in the last session, charging that it is an excuse for not paying other creditors. 

Do they actually believe that any of the states that have guaranteed their sovereign debts for generations have ever used these guarantees as an excuse not to pay their other bills?  

On the contrary, by providing clear and unambiguous mandates to protect their credit first, they actually support and maintain their ability to pay all their obligations.

The most outrageous claim was that this measure would “Pay China First.”            

What xenophobic nonsense.  More than half of our nation’s debt is held by Americans, often in American pension, retirement and savings funds.  The Default Prevention Act would actually protect fare more Americans than Chinese or other foreign investors. 

But whether our loans come from China or Timbuktu – from Grandma’s pension fund or Johnny’s savings bond – without the nation’s credit we cannot meet any of our other obligations. 

Principled disputes over how the debt limit is addressed are going to happen from time to time.  Just a few years ago, then-Senator Barack Obama vigorously opposed an increase in the debt limit sought by the Bush administration. 

When these controversies erupt – as they inevitably do in a free society -- it is imperative that credit markets remain supremely confident that loans to the United States are secure.  Providing such a guarantee could prevent a future debt crisis and give Congress the calm it needs to negotiate the changes that must be made to prevent our debt from burying the next generation and its hopes for a prosperous future.   

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Tom McClintock
Tom`s Blog