Here is one of a number of breakdowns if the US was to instantaneously switch over to a cash in cash out basis, and would have to prioritize spending.

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In a nutshell, the federal government would have to shrink 44% overnight….

Then again, such an analysis assumes a number of things.

  • That all income comes in at once, and all expenses come in at once… and they dont.
  • That there is zero cash on hand. However there is, albeit there is the question as to how long incoming revenues? on hand could last. The best I can figure is a total switch to cash in – cash out won’t occur until mid month a week or so.
  • That the treasury can prioritize who gets paid. The GAO says that debts can be liquidated, but really nothing about prioritization. Any attempt at prioritization by the treasury would end up in court forever, short of it being voted into law.

Some folks may feel that social security and medicare are safe, being they are paid from the trust funds… and they are in a sort of convoluted fashion. However, the supreme court deemed them not a property right, so it is exceedingly likely that they will be lower priority than paying the creditors in China and Japan. Then again, any congress person voting against paying someones social security check would be committing political suicide… thus, a bill to set such priorities would likely be bundled with paying middle east contractors or some other golden calf.

A more realistic scenario is…. govt screws around until the last hour, could be August 3rd, could be as late as Aug 23rd, and then the debt ceiling will be raised… and sadly if the GDP takes a header which is a fair possibility, it will have to be raised a whole lot more than what is currently proposed. The exception to this is if institutional investors (Wall Street, China, Japan) feel they are not well protected, they will force govt to act sooner rather than later.

An interesting observation of the power of institutional investors might be drawn from the date the debt ceiling is raised. If by chance it should occur before Aug 3rd, they are scared to death and very powerful. Otoh, if it drags on until defaults start to occur in drips and drabs, either they are exceedingly well protected somehow, and/or their ability to influence government has dropped multifold since 2008. If by some chance, the debt ceiling doesnt get raised… it becomes clear they have found the ultimate in protection. The tea party, no matter how vocal is nowhere near as poweful as the trillions of dollars at stake.