Another Dumb Right-Wing Idea: Default on the Debt

Over the years I have heard a number of conservatives suggest that defaulting on the national debt wouldn’t be such a bad thing. Today Prof. Glenn Reynolds of the University of Tennessee Law School (better known as “Instapundit”) suggests the idea once again. Says Reynolds:

“SO HERE’S A QUESTION: Would a default on Treasuries accomplish what the Balanced Budget Amendment was supposed to achieve, by forcing the government to spend no more than it takes in? With more collateral damage, of course. . . .”

There are an absurd number of false assumptions and premises inherent in this point that I don’t have time to go through, but here are a few.

1. The Treasury can never default on the debt; it’s simply impossible. (Editorial note appended below.) Here are some reasons.

— First, unlike private borrowers who are constrained by the amount of interest they are willing to pay, the Treasury has no such constraint. It will always pay whatever the market requires, crowding out all private borrowing if necessary.

— Second, the Federal Reserve will always step in to ensure the success of a Treasury bond sale. Although by law the Fed cannot buy Treasury securities directly from the Treasury, it can assure primary dealers that it will soak up any excess supply in the secondary market.

— Third, long before we ever came even remotely close to a situation in which markets even suspected the possibility of default we would have economic conditions that would guarantee some sort of massive fiscal tightening. In particular, interest rates would be vastly higher than they are today, which would make even the most painful deficit reduction measures—crippling tax increases, in particular, as I have explained elsewhere—seem painless by comparison.

2. Even if the Treasury somehow defaulted—that is, failed to make a timely interest payment—it would not achieve what Reynolds and other conservatives wish: an end to all federal borrowing and de facto imposition of a balanced budget by cutting all spending in excess of revenues. Unless one also posits that all federal taxes would simultaneously cease, the Treasury will still have cash flow with which to make interest and other payments required by law.

Not being an expert on the law regarding federal spending I don’t know the precise priority of claims. But certainly, interest on the debt would be first in line for whatever cash flow the government had. That means that interest on the debt would have to be close to 100% of federal revenues before the possibility of default would occur.

Keep in mind also that the Federal Reserve is, in essence, the federal government’s bank. When one cashes a federal check, the Fed pays it from funds the Treasury holds on deposit. In theory, the Fed could simply decide to give the Treasury some float and continue to cash federal checks even if sufficient funds were not immediately available. Since the Fed turns over all its earnings to the Treasury anyway, it could call this float an advance to get around legal restrictions. Keep in mind also that given the Fed’s vast holdings of Treasury securities, with which it conducts open market operations, any rise in interest rates will necessarily increase the Fed’s income enormously.

3. The disruption to financial markets, commerce and the well-being of all Americans from a Treasury default are really beyond my ability to fully describe. But here are a few points to ponder. Interest rates would skyrocket to unprecedented levels, which would cause a collapse of private borrowing and massive capital losses for all bond holders, which include pension funds, insurance companies and foreign central banks, among others. It might be impossible for pension funds to make payments to millions of individuals depending on them for life itself.

The economy would really grind to a halt long before interest rates got so high that default was even on the radar screen. And insofar as the Fed was forced to monetize the debt in order to support the bond market it would lead to hyperinflation. Is Reynolds really willing to turn the U.S. into Zimbabwe just to make a point?

In conclusion, the idea that we should default on the debt rather than raise taxes to deal with a looming fiscal crisis is simply absurd and, frankly, irresponsible. But considering how many absurd and irresponsible ideas are now common currency among the sorts of people who read “Instapundit,” I have to worry whether dimwits like Glenn Beck, Sarah Palin and Michele Bachmann won’t soon be parroting the idea that a default on the debt is preferable to any tax increase whatsoever. This is an idea that needs to be nipped in the bud.


In my haste to write this post I forgot about the debt limit. If Congress failed to raise it then default becomes a realistic possibility because the Treasury would lose the legal authority to issue new bonds. Since the debt limit would have to be increased at some point lest the government fail to have the cash to make Social Security payments and such, the only consequence of this temporary default would be to permanently raise the Treasury’s borrowing costs due to the addition of a risk premium.

About Bruce Bartlett 76 Articles

Affiliation: Forbes

Bruce Bartlett is a columnist for, the online side of Forbes, the nation’s premier financial magazine.

He served for many years in prominent governmental positions including executive director of the Joint Economic Committee of Congress, Deputy Assistant Secretary for economic policy at the U.S. Treasury Department during the George H.W. Bush Administration, and as a senior policy analyst in the White House for Ronald Reagan.

Bruce is the author of seven books, including the New York Times best-selling Impostor: How George W. Bankrupted America and Betrayed the Reagan Legacy, and thousands of articles in national publications including the Wall Street Journal, New York Times, Washington Post, New Republic, Fortune and many others. He appears frequently on CNN, CNBC, C-SPAN and Fox News, and has been a guest on both the Daily Show with Jon Stewart and the Colbert Report.

Visit: Capital Gains and Games

5 Comments on Another Dumb Right-Wing Idea: Default on the Debt

    • Glenn’s comment: “Bruce, it was a question, not a suggestion. Which is why it was phrased as a question. As you should know if you’ve read my blog, I have hardly been encouraging default.”

      The typical Glenn Reynolds “I was just kidding!” defense! It might have weight if Glennn hadn’t said (on his own site no less and in direct response to this article): “I’m not trying to turn the United States into Zimbabwe. That would be the guy in the White House, whom you seem surprisingly anxious to defend.” which is both an “intemperate response” and an ad hominem. Not to mention somewhat scummy since he says one thing here in the comments and act completely differently on his own blog.

      Oh, by the way, Bruce Bartlett’s comparison of Zimbabwe isn’t a hyperbole (like Glenn Reynold’s retort about Barack Obama—which unfortunately carries, in this context, a massive undertone of racism :-() but one of direct factual analogy:
      (Zimbabwe’s problems started when a Robert Mugabe, who is black and been the effective head of state for thirty years, confiscated white-owned land. It was probably an unintended reveal of Glenn’s part, but nonetheless, a serious oversight—and not one that someone, who is actually sensitive to the political and social issues of today, would miss.)

  1. I’m with Glenn. He isn’t suggesting we default, rather he is wondering out loud if that’s the only way to force the US Gov to balance the budget these days. A form of self-inflicted financial shock and awe, if you will.

    Bruce, I think you got too excited about pouncing on Reynolds and would have been better off waiting for a better example of wingnutteriness with which to try to bludgeon him with. JMHO.

  2. From Glenn’s blog:

    ‘UPDATE: Well, I was hoping for a thoughtful email from an expert, but instead I got a typically intemperate blog post from Bruce Bartlett. Bruce, I’m not trying to turn the United States into Zimbabwe. That would be the guy in the White House, whom you seem surprisingly anxious to defend.’

    Your snarky response here Glenn is an insult to the millions of your fellow American’s who, not only cried for relief from Republican fiscal hypocrisy, but voted in unprecedented numbers for relief from that hypocrisy.

    Trickle down voodoo economics is a fraud Glenn. After 30+ years of this fraud, pretty much the entire middle class is now 1 paycheck removed from financial failure. All we middle class have received during this horrific 3 decades long experiment is a greater tax burden, a shift to a more debt centric economy and the corresponding increase to our average household debt.

    Our wages have declined. Especially in terms on non-college livable wages.
    The kind of jobs that used to fuel the middle class were shipped overseas.
    Costs for housing, health and education have left the inflation rate in the dust.

    Obama wants to turn us into Zimbabwe my ass, it’s your republican hero’s who’ve been busy turning us into a 3rd world nation.

    Why don’t you just, go away Glenn, we voted you and yours out for a reason, it’s the adults turn to work out policy and you don’t qualify.

Leave a Reply

Your email address will not be published.