What could really happen if Congress doesn't raise the debt ceiling.

From Dan Ferris in Extreme Value:

Until June 30, investors were focused on what would happen in the wake of the end of the second installment of quantitative easing, the Federal Reserve's eight-month, $600 billion, money-printing, Treasury bond-buying operation. 

Luckily, not much happened after June 30. But now we find ourselves up against another big deadline: August 2. If Congress doesn't raise the debt ceiling by August 2, big things will happen on August 3. The debt ceiling is a legally imposed limit on the amount of debt the U.S. government is allowed to have at one time. It can only be raised by a vote of Congress. 

The last time it was raised was early 2010, when Congress voted on a ceiling of $14.294 trillion. That limit was reached two months ago. Since then, according to U.S. Treasury Secretary Tim Geithner, the government has avoided not paying its bills through "extraordinary measures" and "accounting maneuvers." We're told these measures and maneuvers will run out on August 2. 

Without a debt ceiling increase by August 2, the government will wake up August 3 unable to pay approximately 44% of its bills for August. The overwhelming majority of those bills are simply disbursements of funds for government programs, without which this would be a richer, freer country. Interest on the national debt due in August is not a big item. 

The hype surrounding the August 2 deadline is that the U.S. will "default" on its debt. I see it a little differently. It's unlikely the U.S. will default on its debt on August 3. According to the Bipartisan Policy Center's recent report, interest payments on Treasury securities total about $29 billion for the month of August, and the U.S. brings in about $173 billion a month. There's no reason why the U.S. government should fail to make any of those payments in the month of August. 

What about the $470 billion of debt the government has to roll over in the month of August alone? If it can't borrow more to pay that off, won't it default then? 

That's obviously a bigger problem... But again, not as big as you might think. The U.S. government has about $2.88 trillion of total assets. It appears to have about $1 trillion in cash, stocks, bonds, mortgage-backed securities, and other liquid assets it could use to pay off Treasury debt. If that takes us through the end of September, we'd be able to go another few months, running the total debt back up to the debt ceiling of $14.294 trillion. 

In an April 4 letter to Congress, Geithner said selling assets "would undermine confidence in the U.S." That's like when a government says it won't devalue its currency, or a company president says bankruptcy isn't on the table. Bringing up the possibility of selling U.S. assets automatically refutes the assertion that you're not thinking about doing it. 

In the meantime, in the weeks and months that follow August 2, something unexpected would happen... something nobody in government wants you to know. You'd find out how much you don't need the government. 

For example, you'd find out that the Departments of Commerce, Energy, Interior, Agriculture, and a few others are completely unnecessary and a total waste of money. They'd spend only a couple hundred billion dollars out of a $3 trillion budget, but it would be a huge start on the way to showing you how unneccessary government is. Once that ball got rolling, it'd get harder and harder to stop. 

That's why Geithner is saying it would be a catastrophe not to raise the debt ceiling. And that's why Fed Chairman Ben Bernanke says it would be calamitous. Komrade Obama says it would be "financial Armageddon." They're all trying to scare you, because they don't want you to know that the big, strong government we all depend on so much is really a weakling you can easily live without. 

I relish the possibility of huge swaths of our bloated, oppressive federal bureaucracy shutting down. Even more, I relish the prospect of hundreds of thousands of government employees, people with perfectly productive minds, some of them quite brilliant, making the change from parasites to producers, though I realize this is way too much to hope for. 

I doubt this unleashing will take place. I doubt the voting public will stand for it. I'd like to believe we're a nation of self-responsible, self-reliant adults. My fear is that we've become a nation of whining, dependent children. Unfortunately, the last thing most people want is to be responsible for everything they do, say, need, and want. Freedom means freedom from government assistance. Hardly anybody wants that. But a fella can dream... 

Remember the unleashing of human potential that occurred in the U.S. in the wake of World War II, when all the soldiers came home? It would be similar to that, though it would involve fewer people. Over 4 million servicemen and women came home after WWII. If 44% of the federal government employees were out of work as of August 2, it would amount to roughly 880,000 new productive workers (according to the Bureau of Labor Statistics' estimate of 2 million federal employees). 

Many government employees are highly educated and highly trained. Many are experienced leaders, more than capable of feats of entrepreneurship. Frightened children like Bernanke and Geithner see scary monsters everywhere. Adults with vision and experience see opportunities. 

Would there be disruptions to the economy if the government's role in it was instantly reduced? Of course there would. Would that look ugly in the short term? You bet it would. But I doubt it would be as bad as everyone is trying to scare you into believing. Remember... it's not you and me going broke here. It's the government. And it should go broke. It is broke. It should be forced to shrink expenses, reduce debt, and sell assets. Would this be a bad thing in the long term? Absolutely not. 

There are many good reasons to reduce the size and cost of government in the United States – and few good reasons to pretend the job can wait another minute. 

We could be in for a rocky ride, but it's hard for me to understand how 44% less government would be anything but an economic miracle.