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DoD Plans for Default: But It’s All Up To Treasury

Posted by Colin Clark on


Washington: The Defense Department is busy planning on how to cope with our nation defaulting on its debt, should Congress abdicate its responsibility to the country.

The good news is the Pentagon has money obligated and appropriated so it could pay its bills. The bad news is that Treasury and the White House’s Office of Management and Budget
will decide who gets paid when. That’s essentially what the Pentagon’s point man, Richard Ginman, told reporters at a Defense Writers Group breakfast this morning.

He said he didn’t believe, “…we are going to be the masters or our own destiny

Ginman wouldn’t discuss details of the military’s planning, using that wonderful old Pentagon fallback that everything was, “pre-decisional,” meaning they’ve decided but it’s not really official and they don’t want to tell you.

He made clear that contractors who are not paid right away will be paid interest. And, while Ginman didn’t say this, that interest rate will clearly be much higher should we default since the bond market would place a premium on the never-to-be-forgotten fact that the government of the richest country on Earth was so dysfunctional that it could not always be trusted to pay its bills.

Aside from the interest paid, the companies that build the weapons and supply the services to the Pentagon would likely be slammed by any default lasting more than a few days. “Any gap in payments to defense companies that lasts more than a few days would probably trigger a selloff of shares because it would signal that the sector’s main customer is unreliable,” Loren Thompson, consultant and defense analyst at the Lexington Institute. “Even if the payment shortfall was made up with interest, the overhang of distrust about the federal customer would weaken market confidence and force companies to hoard cash as a hedge against future uncertainties.” [Thompson is also a member of Breaking Defense’s Board of Contributors.]

What do you think?