It obviously would have been a terrible event for the human race if the world had ended Saturday as some had prophesied, but it might not have been all that bad from a federal budget perspective. Not only would the hand wringing over the debt ceiling have been immediately rendered trivial, the Rapture actually could have had a positive impact on the situation if the big overseas owners of Treasuries had all been called to heaven. That would have allowed the debt they owned to be written off and dropped the United States so far below its existing ceiling that it would have been quite some time ó closer to decades rather than years ó before legislation to raise the governmentís borrowing limit would have been needed again.
The irony is that the next date for which a disaster of sorts is predicted has to do with the federal debt ceiling itself. According to the Treasury Department, after using all of the previous tried-and-true techniques available, the governmentís cash flow will reach a crisis situation around Aug. 2. Thatís the date at which the government will have to decide who will get paid on time and who could face a catastrophe because they will have to wait, perhaps for some time.
With this in mind, here are some comments about and reactions to the latest inane debt ceiling developments and pronouncements that have occurred over the past week or so.
1. Government contractors should be very concerned. There has been no official or even unofficial statement about where government contractors are on the priority list of those who will be paid if the debt ceiling issue isnít settled by Aug. 2, but itís hard to see how they will be at the top. Politically, economically and financially, contractors can do less damage than bondholders, recipients of Social Security and other entitlement programs, and federal employees if they arenít paid on time. Suing the government would be expensive and take a great deal of time, and many contractors most likely would be paid before a case could be resolved anyway. In addition, contractors who sue the government run the risk of souring relations with their main (or, in some cases, only) customer.
When you also factor in that the federal contracting community, especially small businesses, may be in the best position to pressure Congressional Republicans on the debt ceiling and that the GOP is likely to need a push, the value of making contractors the first victims becomes even clearer.
2. Investors in government contractors should be very concerned. For all the reasons mentioned in No. 1, stock owners, bondholders and lenders need to think about what will happen if payments to federal contractors are significantly delayed. They also need to consider what it will mean to the business forecasts, profits and stock prices if federal procurements are put on hold ó as already seems to be happening ó as the government positions itself to minimize its cash needs after Aug. 2.
3. The order of payments can indeed be determined. Contrary to what some are saying, the federal government can control who gets paid. The Federal Reserve has said that it canít prioritize the checks it clears when theyíre submitted for payment, and that has led some to believe that thereís no way to put one payee ahead of another. But the Fedís role comes at the end of the payment process when itís too late to pick winners and losers, rather than when a project is formally begun or when a federal department or agency requests that a check be written. There are indeed procedures ó mainly deferrals, rescissions and apportionment ó available to delay anticipated payments at both of these steps.
4. Why is anyone talking about the acceptability of a few daysí delay in raising the debt ceiling? The biggest debt ceiling debate of the past week ó that there wonít be an adverse reaction from financial markets if the debt ceiling isnít raised until a few days after the Aug. 2 deadline ó is a prototypical straw man argument. This contention of Sen. Pat Toomey (R-Pa.) and others might make some sense if a debt ceiling agreement was already in place and Congress and the White House just needed a few days to work out the details. In other words, if we were at the end of July and everyone knew a debt ceiling increase definitely would be adopted in just a few days, Toomey might be right. But the argument makes no sense whatsoever more than two months before the deadline without even the prospect of an agreement. If the markets donít think an agreement of some kind is likely, theyíre likely to react negatively both before and after Aug. 2.
5. Why not hold a bake sale? Yes, the federal government can sell or lease some assets to raise cash if the debt ceiling isnít raised. However, there are legal limitations and other restrictions about what can be sold or leased, and the effort isnít likely to raise a great deal of money very quickly. As any financial analyst will tell you, selling the furniture to make a mortgage payment isnít really a sound financial practice. Selling the furniture when everyone knows youíre in desperate need of cash is even worse.
Stan Collender is a partner at Qorvis Communications and founder of the blog Capital Gains and Games. He is also the author of ďThe Guide to the Federal Budget.Ē
Former Sen. Scott Brown, R-Mass., candidate for U.S. Senate in New Hampshire, holds his hand over his heart during the singing of the national anthem as he waits to take the stage for his town hall campaign rally with Sen. John McCain at the Pinkerton Academy in Derry, N.H., on Monday, Aug. 18, 2014.