Debt ceiling failure; Treasury must decide which bills to pay

Statue of Morris, Abbotsford - This garden is called "The Morris Garden" after this statue, whose sculptor John Greenfield died before he could complete it, and which was presented to Abbotsford in 1850 by William Lockhart of Milton, who was the half-brother of Mr Hope-Scott, Sir Walter's son-in-law. Morris is on his knees begging forgiveness from Helen MacGregor-Campbell after being implicit in giving over her husband Rob Roy to the authorities.

Will Social Security recipients be reduced to begging for checks after Aug. 2? (Photo Credit: CC BY-SA/Barbara Carr/Geograph)

When the flood comes, no parent wants to have to choose which child to save. Thankfully, the impending U.S. debt default flood isn’t quite so tragic, but it will hurt. If the $14.3 trillion debt ceiling doesn’t rise by Tuesday, Aug. 2, the Treasury Department will have to decide who gets paid and who doesn’t.

Prioritizing payment when bills are insurmountable

Democrats and Republicans have so far failed to reach a bipartisan debt ceiling deal. GOP Speaker of the House John Boehner has failed to convince members of his own party to vote for his debit limit plan. Even if Boehner’s reported strong-arm techniques for GOP stragglers had proven successful, the Democratic Senate has announced it will strike down any legislation that doesn’t include tax hikes.

Assuming nothing changes by Tuesday, the ball will be in the U.S. Treasury’s court. The Treasury Department will have to prioritize U.S. debt payments, because there won’t be enough cash on hand to meet all of the nation’s debt obligations, and further borrowing in the bond market to make up the difference will be prohibited, writes CNN Money.

Who will be paid?

Investors owed interest on U.S. debt will reportedly be the first on the list to be paid, as failing to pay them would result in immediate default, with all the negative consequences. However, the Treasury Department may decide on its own that it doesn’t have the authority, which means that interest owed to bond investors will come first, followed by bills as they come due, former Treasury official Jay Powell told CNN.

According to Bloomberg, the Federal Reserve is preparing an emergency guidance plan for banks in the event that the Treasury runs out of money. Contingency plans concerning how payments are made, what happens to collateral pledged for loans and numerous other matters will go into effect should U.S. Treasury securities suffer a credit-rating downgrade.

Will I get my Social Security check?

Retirees and near-retirees on early Social Security dispersal want to know whether their Social Security checks will keep coming. Unfortunately, the Obama administration has been somewhat unclear as to whether a disruption of payment will occur. Retirees, veterans, business owners, federal workers, soldiers on active duty and Medicare and Medicaid recipients are waiting to see if the money will keep coming.

White House spokesman Jay Carney tried to put a positive spin on the uncertainty.

“At midnight on August 2nd, we don’t all turn into pumpkins,” he said during a press briefing. Carney classified the “Who will be paid?” question as a kind of “Sophie’s choice.”

Scary math

Estimates from the Bipartisan Policy Center indicate that the U.S. Treasury will be short $134 billion for August. It is unclear how much cash will be available to the Treasury. There may be enough available to pay bills in full through Aug. 10, but the Treasury may decide to withhold some payments in order to make interest payments later in the month and still maintain some cash in the coffers.