Why Interest Payments Come First
At some point next week, if Congress doesn't agree to raise the debt ceiling, the U.S. government may have to decide which bills to pay. What comes first: Social Security checks? Military spending? Food stamps?
There's not even a choice, says Jerome Powell, a former Under Secretary of the Treasury for Finance.
"Interest will be paid first," he says. "There's really no thought process there, it just has to be that way."
Why pay interest on U.S. government bonds before paying for, say, food stamps?
"If we start defaulting on our debt there are going to be a whole lot more people on food stamps than there are now," Powell says.
That's because government debt is essential to the plumbing of the economy. People and companies treat investments backed by Treasury bills almost like cash — and they expect T-bills to be as reliable as cash.
"Treasury bills are the only financial instrument in the world where anyone can invest in them and believe there is literally no risk of not being paid back," Powell says.
Mark Peterson is the treasurer of ServiceMaster, a company based in Memphis, Tennessee. They do lawn care, among other things. He relies on investments backed by T-bills to pay his employees.
"In our TruGreen lawn business, the season is summer," he says. "So in the middle of June and July, we're applying a lot more applications of our fertilizers and pesticides on people's lawns. We then bill the customers, and the customers' payments come in later."
No problem-- Peterson just taps the company's investments, and pays his employees with that money. When the payments come in, he reinvests it in T-bills
If you don't pay back your creditors, then you're no longer the least-risky investment in the world. People will buy other bonds, that look safer. And it will become more expensive for the government to borrow money.
It turns out that in fiscal crises, interest on bond payments gets VIP treatment again and again.
In New York's financial crisis in the mid-1970s, the city put interest payments on bonds first — even in front of sanitation workers, which upset the sanitation workers union.
"They let the garbage pile up on the streets of New York," says Donald Kummerfield, former budget director of New York City. "The city was ... stinking."
And just a few weeks ago, when Minnesota's state government had its own crisis, the state passed a law that said payments on bonds came before everything else.
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