Today's Most Important Debt Ceiling News Is What Obama And Geithner Didn't Say

Obama gave a press conference.

Geithner sent a letter to Congress.

The most important part of Geithner's letter (which built upon what Obama said) had to do with what would happen in the debt ceiling breach, where he enumerated everything that wouldn't get funded:

The U.S. government makes approximately 80 million separate payments per month. These include payments for Social Security; Supplemental Security Income; Medicare; Medicaid; national security needs, including military salaries, military retirement, veterans’ benefits, and defense contractors; income tax refunds; federal employee salaries and retirement; law enforcement and operation of the justice system; unemployment insurance; disaster relief; goods and services sold to the government under contracts with small and large businesses; and many others. If Congress does not act to extend borrowing authority, all of these payments would be at risk. This would impose severe economic hardship on millions of individuals and businesses across the country.

It is important to point out that extending borrowing authority does not increase government spending; it simply allows the Treasury to pay for expenditures Congress has previously approved. Failure to meet those obligations would cause irreparable harm to the American economy and to the livelihoods of all Americans. Even a temporary default with a brief interruption in payments that Congress subsequently restores would be terribly damaging, calling into question the willingness of Congress to uphold America’s longstanding commitment to meet the obligations of the nation in full and on time. It should also be noted that default would increase our borrowing costs and damage economic growth and therefore add to future budget deficits, not decrease them. This is why no President or Secretary of the Treasury of either party has ever countenanced even the suggestion of default on any legal obligation of the United States.

Notice the one thing Geithner doesn't say? He doesn't say that a debt ceiling breach would result in not making interest payments.

The term "default" gets thrown around a lot, and a lot of people seem to suggest that if the country doesn't make its legally obligated to, say, Social Security, ten that would be a kind of "default."

And although that would be an economic calamity, there is an order of magnitude difference between not making a payment to an entitlement recipient, and not making a coupon payment on a US Treasury, an instrument that's at the heart of the global financial system, and is the very definition of a safe asset.

As one analyst put it, the US actually defaulting on the debt itself would be the financial equivalent of the Hieronymous Bosch painting depicting hell. Hell coupled with complete chaos.

Of course, to believe that the Treasury can make interest payments, while not making other payments, is to believe that the Treasury has the ability to "prioritize" payments, which is both a legal and technical nightmare. The Treasury has been extremely cagey about what it can do, but here Brad Plumer at Washington Post makes a key observation:

In theory, Treasury might be able to prioritize bond payments above all else, says Steve Bell of the Bipartisan Policy Center. The computer system that handles U.S. sovereign debt, Fedwire, is separate from the system overseeing payments to government agencies and other vendors. Yet it’s unclear whether Treasury has the legal authority to prioritize in this way — the agency has never dealt with this situation before. “Anyone who says they know for sure whether this is legal is not telling the truth,” says Bell.

So it's not preposterous that the Treasury might be able to technically prioritize US sovereign debt. And both Geithner and Obama omitted bond payments from those things that would not get made in a true debt ceiling breach.

There's no doubt that breaching the debt ceiling would be a major legal and economic calamity, but the ability to keep making bond payments (if you think that's what these puzzle pieces indicate) represent the difference between a calamity and an epic calamity.

SEE ALSO: Obama explains why he won't negotiate on the debt ceiling >