I still expect that there will be an agreement in Washington to raise the debt ceiling soon. However, just out of curiosity, let’s review the actual budget numbers over the past 12 months through June and use them to consider what might happen if the government had to balance its budget effective immediately.
Over the past 12 months, federal outlays totaled $3,559.5 billion, well exceeding tax receipts, which totaled $2,298.8 billion. So over the past 12 months, spending would have had to be reduced by 35.4% to balance the budget. (Of course, that ignores that doing so would have depressed economic activity and tax revenues.)
What government spending would be cut to balance the budget if the debt ceiling isn’t increased? The first priority almost certainly would be to make good on interest payments on the federal debt. That number was $220.8 billion over the past 12 months. Social Security obligations should also be met. They totaled $725.2 billion over the past 12 months. So to balance the budget over the past 12 months would have required a 49.2% slashing of outlays excluding those on interest and Social Security.
In Friday’s WSJ, Thomas R. Saving, a former trustee of the Social Security and Medicare Funds, disputed President Barack Obama’s assertion that “there may simply not be the money in the coffers” to send out Social Security checks if the debt ceiling isn’t raised. In fact, the Social Security trust fund has about $2.5 trillion in special nonmarketable bonds issued by the Treasury. Since it isn’t earmarked, the money is gone, having been spent along with other tax revenues on the government’s general expenses.
However, the trustees of the fund could redeem the special bonds to raise the monies needed to send out checks to Social Security recipients. Mr. Saving notes, “By law the Treasury is bound to redeem any bonds presented to it by the Social Security Administration. And when the Treasury does, total government debt subject to the debt limit falls by the amount of the redemption--thus freeing up the Treasury’s ability to issue new bonds equal in amount to the redeemed Trust Fund bonds.”
If we can’t trust in the trust funds set up by the government to fund our retirements, and if we can’t trust our lawmakers to raise the debt limit and reduce the federal deficit to assure financial stability, what should we do? What many of us are doing is putting our trust in gold. This morning, the price of gold is at a new record high of $1,619 per ounce. It may be rapidly converging to $2,516, which is the inflation-adjusted equivalent of the June 1980 record high.