The following is a post from Economy in Crisis by Dustin Ensinger. Click here to see the post online.
With a showdown over the national debt ceiling looming, possibly as soon as March, two Republicans are attempting to legislate priority of payments in the event that the statutory borrowing limit is not raised and America essentially defaults on its obligations.
Under the legislation, proposed by Sen. Pat Toomey (R-PA) and Rep. Jim Jordan (R-OH), China, not soldiers, Social Security recipients or American citizens would take precedence.
China is not the only beneficiary at the expense of the American people. The bill would require the U.S. Treasury to pay all foreign countries and financial institutions ahead of domestic investors, banks and citizens of America. China just happens to be by far the largest foreign holder of American debt.
“I intend to introduce legislation that would require the Treasury to make interest payments on our debt its first priority in the event that the debt ceiling is not raised,” Sen. Pat Toomey (R-PA) wrote in a Friday Wall Street Journalop-ed, attempting to paint it as the fiscally prudent thing to do.
Others, however, say that the legislation is an affront to all American citizens. Democrats have derisively called it the “Pay China First Act.”
“I think it is a dreadful idea,” Sen. Kent Conrad (D-ND) told National Journal. “Basically what they are saying is, pay China first. Are we going to forget about the American public and the things that they need? Somehow they are secondary? And paying the Chinese and the Japanese is the first priority of this country? I don’t even know how to describe that idea; it’s just a very, very bad one.”
Even Treasury officials are slamming the legislation as a misguided, cynical political maneuver in the face of serious economic challenges.
“[T]his idea is unworkable,” said Deputy Treasury Secretary Neal Wolin in a statement. “It would not actually prevent default, since it would seek to protect only principal and interest payments, and not other legal obligations of the U.S., from non-payment. Adopting a policy that payments to investors should take precedence over other U.S. legal obligations would merely be default by another name, since the world would recognize it as a failure by the U.S. to stand behind its commitments.”
“Such a policy would also be unacceptable to American servicemen and women, retirees, and all other Americans, who would rightly reject the notion that their payment has been deemed a lower priority by their government.”
Currently, the debt ceiling sits at $14.3 trillion. Lawmakers will be forced to vote on whether or not to raise the ceiling by March. If the statutory borrowing limit is not raised, it essentially means that the nation is in default. It will not be able to borrow any more money to make interest payments on debt or anything else.
China currently holds roughly $895 billion in U.S. debt, making it the third largest holder and by far the largest foreign holder of American debt. Japan is fourth with $877.2 billion.
U.S. Pension funds ($706.5 billion), mutual funds ($637.7 billion), state and local governments ($511.8 billion) and the Federal Reserve (roughly $5 trillion) would all be short-changed under the Republican plan.
“What they are saying essentially is that the full faith and credit of the American government extends to a lot of foreign countries, but it doesn’t extend to the American people themselves,” Rep. Chris Van Hollen (D-MD) said.