Stockman: Why Grandma Yellen Must Be Forced To Prioritize Spending

Let's recap the 2011 great debt ceiling showdown. On July 28, only a few weeks before the Treasury's borrowing power would have run out, the yield of the benchmark 10-year UST was at


The debt ceiling was increased by a significant amount despite the heated warnings that were given to the newly elected GOP House majority for months about the need to pass a "clean" increase in the debt ceiling.


Early January 2011 yield.

The whole ordeal of seven months on Capitol Hill over the expiring borrowing power resulted, as shown below, in an irregular but notable

You can also decline

The benchmark bond yield is the rate at which bonds are compared to each other.

Earnings on 10-Year UST from January 2011 to August 2012.

The House GOP capitulated on July 31st, granting a large debt ceiling in exchange for what was announced to be $2.1 trillion in deficit reductions within the next decade. The yield then dropped to


On August 5, S&P drastically cut the UST's credit rating from AAA+ to AA+, after the market closed.

S&P was not amused at the 'brinkmanship of the banana republic' that had dominated Capitol Hill for most of the past year. They sternly warned Washington that --

We believe that American political and policy institutions are less effective, stable and predictable than they used to be.


The company released a statement that said, "We are experiencing a period of economic and fiscal challenges."

The yields soared the following week as a result of the purported loss of America's pristine credit rating. This was despite the fact that Wall Street and Washington had warned us ad nauseam in the lead-up to this crisis.

No, it didn't. By the end of 2011, the yield had fallen further to


As shown above, the price of the stock had dropped to only $0.01 by the time the first anniversary of its downgrading was celebrated in early August 2012.


By the end of the year, the inflation rate Y/Y was 2.0% on the 16% CPI trimmed average. One year after the 2011 debt ceiling drama, the real yield of the benchmark government bond was

negative 50 basis points.

The US government has lost its perfect credit rating, but was rewarded by tens and tens billions in annual savings on debt service!

One could argue, of course that the $2.1 trillion plan to reduce the deficit, which was accompanied by the GOP's capitulation on the debt ceiling, is what caused yields not to rise, but rather go down. This argument is also not valid.

The deficit reductions would be achieved through:

The freeze on discretionary defense and non-defense budgets was supposed to save

900 billion dollars

Over ten years


$1.25 trillion

Savings from entitlements through permanent reforms of Social Security, Medicare and Medicaid, Food Stamps, etc. The Joint Select Committee on Deficit Reduction will make recommendations.

In the end, it turned out that the'study panel' approach to entitlement reform was not intended to be the usual duck-and-duck airball. In the debt ceiling agreement, a backup mechanism was also included to encourage the Joint Committee to find a compromise. Sequestration, or automatic cuts, would be triggered if the Joint Committee failed to achieve the additional $1.2 trillion in savings.

In general, these automatic cuts across the board for 2013 and subsequent years would have resulted in an 8.4% cut to most non-defense discretionary program, a reduction of 7.5% in defense programs affected, an savings of 8.0% in mandatory programs affected other than Medicare and a 2.0% cut in Medicare provider payment. Medicare cuts would remain at 2 percent from 2014 to 2021 while other program percentages would shrink.

In the end, it turned out that the Select Committee did not produce any real budget savings. The sequestration was then triggered from FY 2014 through FY 2021, despite the gimmicks.

On the entitlement side, it's hard to see how the sequester's 'cuts" have affected the budget. In fact, federal transfer payment spending rose from $1.8 billion in 2011 to $2.9 billion by FY 2021. This represents a 64% increase.

Federal Transfer Payments from 2011 to 2021

In the same way, the total eight-year outlay (FY 2014-2021), was also to be limited at $4.11 Trillion. The actual amount of expenditures for the period was $5.49 trillion.



By the end of the plan's last year (2021), the results were a complete joke. The annual spending cap was $558 billion but actually came to $895 billion.



The eight-year cap on defense was also supposed to be $4.342 billion but came out at $5.109 trillion.


The House GOP plan had set a cap of $589 billion for FY 2021, but the actual expenditures came to $742 billion.

The Rube Goldberg Budget Device that former GOP Speaker John Boehner crafted as a reward for raising the debt ceiling was meant to limit the amount of money spent on defense and nondefense.

8:45 trillion dollars

The Joint Select Committee has not proposed any reforms to entitlements for the next 10 years. The actual level was

$10.60 trillion.

These fakers have missed their target by

215 Trillion Dollars

Over the period!

The Boehner plan was a complete failure, as it left entitlements unaddressed. The overall deficit after FY 2011 is a mockery. CBO had estimated at the time that the Federal deficit for the 10-year period impacted by Boehner's plan (FY2012 to FY2021) would be $1.5 trillion.

$3.49 trillion


The actual figure was 3.3X higher than the original estimate.

$11.60 trillion


The public debt doubled in the decade following the debt ceiling showdown of July 2011. In 2021, the $15.2 trillion of public debt in 2011 had grown to $29.6 trillion. Since then, it has continued to rise into yet another debt ceiling crisis.

Total Public Debt from 2010 to 2021

We are supposedly three weeks from Fiscal Armageddon. What is really ahead, however, is not the much-hyped 'national bankruptcy', but rather something far more significant: the time when Grandma Yellen will be forced to make use of the Treasury's authority in order to prioritize receipts among the various spending accounts.

It's time to shout. Taxpayers continue to pour money into the US Treasury, so there's more than enough cash inflow for the Treasury to meet its debt obligations and other priorities.

In April of this year, for example, Uncle Sam's interest payments totaled $62 billion. However, that amount was only 9.5% of $639 in Federal receipts collected for the month. By every calculation we know, Uncle Sam would have been able to meet his interest obligations even without borrowing a dime.

Even though April is a busy month for tax collection, with the April 15th deadline, the average monthly inflow of funds has been sufficient to cover the interest payments, as well as several other priorities, which will likely rise to the top when the pressure mounts.

Average Monthly Value, FY 2023 to Date

Federal receipts:

$448 billion;

Net interest payments: $61 billion;

Social Security Payments : $128 Billion

Veterans Services & Compensation: $26 billion;

The Military Pay and O&M Budget: $47 Billion;

Food Stamps, Welfare & SSI : $22 Billion

The Total

Big Five

Spending accounts:

$285 billion;

All other accounts left with receipts: $163 billion

During the first half of this year, the average monthly expenditure for all accounts other than the Big Five was 318 billion dollars. In theory, the debt ceiling standoff could last for one month and only 51% of all pending bills would be paid. This includes payments to highway builders, medicare providers or state medicaid agencies as well as Federal civilian bureaucrats, retirees and Federal civilian civil servants.

It would never be a full month. The White House would be dragged down by the fury of those affected if they were to shove $318 billion in non-prioritized bills into a drawer.

Sleepy Joe, in a nutshell, would be willing to negotiate quickly and flexibly about real cuts in spending, and not just the usual budgetary flimflam.

The House GOP and Speaker McCarthy must now force Grandma Yellen into prioritizing spending.

The fiscal equation will be forever changed once the Big Lie of debt 'defaults' is exposed in this way.

The taxpayers, and their representatives, would have the power to stop this fiscal doomsday.

What is at stake is, to put it another way, the need to dispel the myth that the president is compelled to helplessly sit by and let the debt default happen.

Laurence Tribe of Harvard Law School, dean liberal constitutional experts and a leading scholar, has debunked this old-fashioned notion, among many others. Professor Tribe made the following statement several weeks before August 2011, when the debt crisis erupted.

This brings me to the second point I want to make: What is the government going to do, if on August 3 it doesn't have enough money to pay for all the expenses that Congress has mandated by law? The answer is, I believe, that it must

prioritize expenditures:

Some payments are simply unavoidable


Until the Treasury has enough funds to make them.

What are the House Republicans awaiting?

They have the go-ahead to defend their position from the nation's leading liberal scholar. In the first instance, that would mean forcing Grandma Yellen's priority to be debt service payments or other important items while leaving the rest to pile up in the US Treasury's great hall of invoices.

It is important to keep in mind that Uncle Sam's tardiness isn't a default.

In other words, Uncle Sam's sucklers need to know that, while he will always pay his bonds on time, his trade "payables" may be stretched from time to time when his checkbook gets overdrawn.

The Roberts Court would not hesitate to approve of the set of priorities and debt service prioritizations shown above, or any other set that is plausible. Even if the matter was litigated by some idiotic lobby group who would sue against the President for prioritizing receipts, Roberts Court would be happy to approve.

Your editor knows that it's difficult to be clearer than that. We faced this question repeatedly during Ronald Reagan’s brief rebuke of Leviathan. Mick Mulvaney was a former budget director, and later a member of Congress. He noted this in October 2013, when he was asked about the occasional feigned failure to pay.

There is no default. There is a [Office of Management and Budget] Directive

From the 1980s

The process that led to the failure of the debt ceiling was clearly laid out in the document.

Treasury Secretary

Prioritize interest payments

It is obvious that the Imperial City fears those three words in bold more than Dracula did a glittering cross. What is at stake, however, is whether or not even the semblance fiscal sanity that was once possible can be restored based on this primitive and last remaining source of budgetary lever.

There may be some sanity this time. The Fed cannot monetize debt as it did in 2011 or thereafter. This was, in the grand scheme of things, one of the stupidest financial decisions ever made by the state.

It means that, for the 10 years of the 2011 deal on the debt ceiling, the inflation-adjusted rate of interest on the benchmark UST has been negative almost 50% of the time. When it was positive, it was well below the 1.0% mark in every month except five. The weighted real average interest rate for the entire period was therefore w

Below the zero bound.

It was this massive distortion of economic signalling that caused the Brobdingnagian debts and financial bubbles which hang over the American Economy like the Sword of Damocles.

Inflation Adjusted Yield on 10-Year UST September 2011 to September 2020

Interest rates didn't rise when Congress delayed enacting an 'clean' increase to the debt ceiling in spring 2011 and when S&P downgraded America's credit rating in August. They also didn't increase when the Washington uniparty's big agreement to reduce deficits was shredded and mocked by politicians in the decade that followed.

It's not that deficits and debts are unimportant. The Fed's money printing spree in the period under consideration delayed the reckoning.

At the time of S&P's downgrade, the Fed's Balance Sheet stood at

$2.88 Trillion

It took 98 years for the Fed to reach its current level since it was founded in 1914. It was at

$8 trillion

Triple what it took a century before to accumulate.

The Fed, then, monetized more than $5.7 trillion in public debt over the course of a decade, or about 40% of all new US Treasury issues. Other central banks took down a significant portion of the remainder.

No more. The Fed's 'pivot' has been made, but not the way Wall Street gamblers hoped. Even our Keynesian currency-printers are aware that they have released the inflation-genie and must keep their printing presses running, not only on idle but also in operation.


For a long time ahead.

The Fed's actual anti-inflation program will shrink its balance sheet even though the US Treasury is contemplating issuing up to $2 trillion in new debt each year.