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Is there a chance we will default on our debt payments?

October 13, 2021

I try not to get political in these commentaries, but when I hear something that deals with financial matters and is an outright lie, I cannot help myself. I keep hearing Nancy Pelosi and others say if we do not vote to raise the debt ceiling, then what will happen is the full faith and credit of the United States will be destroyed because we will default on our debt.

Now, I want to walk you through this statement. It's very, very important because this is your country. These are your taxes, and these are more scare tactics. So, let's unravel this. Okay?

First of all, we're not going to default on our debt service. Here's why. Whether the government shuts down or goes on, you keep paying your taxes. The Treasury keeps collecting your taxes via the I.R.S., to the tune of approximately $320 billion every month.

So I went and I looked, what part of that goes towards that service every month? Approximately $44 billion. Now, wait a minute, if the Federal government is receiving all forms of income taxes and user fees, $320 billion a month, and $44 billion a month is what the debt service costs, how will we default? We won't default. That's the point.

Then they say if we don't raise the debt ceiling, then we are not paying for all the expenses that took place in the prior administration. That's another bald-faced lie. That money is already gone.

To raise the debt ceiling, we're talking about forward spending on additional programs, that's what we're talking about. They want to raise the debt ceiling to pay for their massive, massive reengineering of society, redistribution of wealth, and the imposition of their socialist agenda. That's what they're talking about.

All right, some additional points I want to make on this, too. There is a requirement that if we get to the net of $320 billion a month, minus the $44 billion a month for the debt service, there is a priority in which the money HAS to be spent. That includes Social Security, Medicare, the VA, Federal pensions, among other things.

So those will be paid no matter what! They're the first in line after the debt service, and the reason you have to pay the debt service first is that the 14th Amendment compels it. It says: "The validity of the public debt of the United States authorized by law including debts incurred for payment of pensions and bounties for services and suppressing insurrection or rebellion ..." remember, this was passed right after the Civil War, " ... shall not be questioned."

So the debt service comes first, then you have the entitlement programs, we call them, and then the rest that's left. Well, Congress and the President have to work out priorities. They have to live within the budget. They can't borrow any more money.

And so what Nancy Pelosi, Biden, and the others are telling you is the economy will collapse, that we will default on our debt. Which we certainly will not! They are saying that people won't get paid Social Security, but they certainly will. And they are trying to scare the hell out of you. I guess you could say, “What is new?”

More on the economy

In 2009, after overly strict mark-to-market accounting rules were altered, we said the Financial Crisis was over. It was hard to get our voice heard, though, because both sides of the political aisle were busy saying the economy stunk. Political liberals tried to use the crisis to grow the government and increase bank regulation. Political conservatives said it was a "sugar high" and that President Obama was going to cause a Depression. It was all spin, all the time.

That's what it seemed like last Friday when the September jobs report was spun into terrible news.

Yes, nonfarm payrolls rose an underwhelming 194,000 in September, well below the consensus expected 500,000. Meanwhile, the labor force (the number of people working or looking for work), declined by 183,000. Some liberals seized on these figures to say (1) the expiration of bonus unemployment benefits didn't boost jobs like free-market supporters claimed, (2) women are hesitant to get jobs because of COVID and kids at home, and (3) the economy needs more stimulus.

But the jobs report only captured the first couple weeks of expired benefits, and, as a result, it's too early to tell the real impact of the expiration. Many recipients may have piled up enough savings to be patient in re-entering the labor force. Meanwhile, vaccines, perhaps boosters, and waning COVID case counts should help more sectors return to normal. And if the amount of stimulus applied to the economy already hasn't worked, what makes anyone confident even more stimulus would work? Wouldn't it call for a different strategy entirely? 

The bottom line is that the employment report wasn't really that bad. It wasn't great, but it wasn't awful, either. Payrolls were revised up to a combined 169,000 for prior months. Much of the weakness in September itself was due to public school jobs that are still not back to normal due to COVID. The civilian employment measure of job creation was up a healthy 526,000. And, most importantly, the number of hours worked rose 0.8% in September, the equivalent of more than one million jobs. In addition, wages per hour rose another 0.6%.

At this point, we expect a much stronger employment report for October. Supply chain problems, vaccine mandates at private companies, kids not being back in school...all of this...mean a more volatile economic environment, but easy money from the Fed and less fear of COVID are continuing to boost economic activity. Yes, some disappointing numbers, but the economy has not ground to a halt.

Right now, third-quarter real GDP growth looks like it's coming in soft – at around a 2.0% annual rate, maybe below – and that report arrives just six days before the next Fed announcement. But we also expect both faster job growth and real GDP growth in the fourth quarter. As a result, Jerome Powell is likely to follow through on his intention to start tapering in November. (Increasing interest rates) This may cost him his job, but even if the Fed does taper it will still be easy.

As it's happened in the past, economic reports have become a political football, with each side trying to use the data to score points for their side, greasing the wheel of politics to try to get policy or elections moving in their preferred direction. What's important for investors is to focus on the data and underlying economic forces, not the narrative driven by politics.

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