Will Trump Use Obama’s “Secret Debt Ceiling Plan” To Avoid A U.S. Treasury Default?
by Tyler Durden
ZeroHedge.com
Jul 14, 2017
After voting to repeal and replace Obamacare 60 times under the Obama administration, Senate Republicans, now that it counts, are locked in a heated civil war over how or if they should even modify the controversial legislation. As proven time and again, despite sharing a common party, conservative and moderate republicans have very little else in common.
So, while many may think that a repeat of the 16-day government shutdown in 2013 is unlikely while a single a party controls all three branches of government in Washington D.C., we suspect it may not be quite as simple as that. Without a budget in place that truly balances, conservative republicans will most likely be unwilling to approve debt ceiling increases no matter who is sitting in the White House.
While republicans have attempted to get ahead of the game by passing a debt ceiling increase well in advance of a breach, efforts so far have failed. And while it may seem far away, the U.S. government will reach its statutory limit on borrowing some time in October. So how will Mnuchin handle the Treasury Department if Republicans fail to act and Democrats refuse to play ball? Turns out Obama had a plan for that. Per Bloomberg:
When the nation almost breached its debt ceiling six years ago, the Federal Reserve and Treasury drew up contingency plans that were kept secret until January, when transcripts of an Aug. 1, 2011 conference call at the central bank were released after a customary five-year lag.
Under the contingency plan, holders of U.S. debt and recipients of social security, veterans benefits and other entitlements would be paid first. Everyone else, such as government contractors and federal employees, would be at risk of payment delays or partial payments.
Though the scenario nominally protects holders of U.S. debt by prioritizing the payments they are due, it raises fears that the value of their underlying assets could suddenly decline if the U.S. government’s reputation for creditworthiness is damaged.
“I’m assuming that prioritization is the fallback,” said Lou Crandall, chief economist at Wrightson ICAP LLC. The acknowledgment in the Fed transcripts of the existence of a backup plan to pay interest first makes it more plausible, he said, calling it a “truly terrible idea.”
Under the prioritization plan described in the 2011 transcripts, Treasury would make all semi-annual coupon payments on debts in part by using monies built up by deferring other obligations. The government would auction new debt at regularly scheduled times only to fund old debts that matured.
The Rest…HERE
