Yellen’s June 1 Deadline May Not be Real

The media and both parties have tended to conflate a shutdown with defaulting. That has never happened with past shutdowns.

The US budget is again teetering on running out of money because the Republicans and Democrats are playing a game of chicken on whether to raise the debt ceiling. The debt ceiling caps how much the US can borrow through issuing bonds. Treasury Secretary Janet Yellen has warned that failure to pay US bondholders will cut revenue to foreign countries, corporations worldwide, US IRA accounts, and personal holdings, which “would undoubtedly cause a recession in the US economy.”

That assessment was backed by Beth Ann Bovino, chief US economist at Standard and Poor’s, who predicted that “the impact of a default by the U.S. government on its debts would be worse than the collapse of Lehman Brothers in 2008, devastating markets and the economy.”

Yellen conditioned this catastrophe from occurring when she said at the beginning of the year, “Once all available measures and cash on hand are fully exhausted, the United States of America would be unable to meet its obligations.”

But those conditions can be met within a government shutdown. Unfortunately, the media and both parties have tended to conflate a shutdown with defaulting. That has never happened with past shutdowns. Not even during the longest ones of 22 days in 1995 under Pres. Clinton, 17 days in 2013 under Pres. Obama, and 35 days in 2018–19 under Pres. Trump.

Not defaulting on loans was accomplished since the “cash on hand” was not exhausted. That’s because income and payroll taxes are the federal government’s primary revenue sources. As a result, the Office of Management and Budget (OMB) estimates that net interest payments on the debt will be a little less than $400 billion this fiscal year, or 6.8% of all federal expenses.

Consequently, without borrowing additional funds to continue operating, the government in the past and currently takes “extraordinary measures” to avoid defaulting on loans. In short, some government ‘obligations” to continue services and functions are trimmed or halted. The most extreme measure is not paying federal employees to work or furloughing…