I appreciate your attention to this important issue and I look forward to working with you and
other Members of Congress in the weeks ahead.

Sincerely,
Lif be BR
AeaGfl Ca
ce: The Honorable Patrick Toomey
The Honorable Richard Burr
The Honorable Tom Coburn

The Honorable Thad Cochran
The Honorable Orrin Hatch
The Honorable Mike Johanns
The Honorable Ron Johnson
The Honorable James Inhofe
The Honorable Mike Lee
The Honorable Mitch McConnell
The Honorable Rand Paul
The Honorable Rob Portman
The Honorable Jim Risch
The Honorable John Thune
The Honorable David Vitter
The Honorable Roger Wicker


SZ
DEPARTMENT OF THE TREASURY
WASHINGTON, D.c.

SECRETARY OF THE TREASURY

June 28, 2011
The Honorable Jim DeMint
United States Senate
Washington, DC 20510

Dear Senator DeMint:

1 am writing in response to your letter of May 23, 2011, regarding the statutory debt limit.
President Obama is strongly committed to restoring fiscal responsibility, and he has put forward
a specific framework and set in motion a process to work with both parties to accomplish this
critically important objective. Although agreement has not yet been reached, we have made
progress toward that objective, and I welcome the statements by leaders of both parties making
clear that the debt limit must be increased in order to protect America’s creditworthiness.

The debate over the debt limit can seem esoteric, but a failure to resolve it in the near term would
have painful implications for people in every walk of American life. It would have a serious
impact on members of the Armed Forces who depend on paychecks to feed and house their
families, Social Security recipients who subsist on their monthly benefits, veterans who rely on
the government for their retirement and health care needs, and small business owners or
employees who provide goods and services to the country.

In your letter, you suggest that the debt limit should not be raised, and instead that federal debt
be “capped” at the current limit. You further propose that after the government’s borrowing
authority is exhausted in August, the United States should for some indefinite period pay only the
interest on its debt, while stopping or delaying payment of a broad swath of other commitments
the country has made under the law.

Ihave expressed my concerns about this idea before, but I will restate them to be clear: this
“prioritization” proposal advocates a radical and deeply irresponsible departure from the
commitment by Presidents of both parties, throughout American history, to honor all of the
commitments our Nation has made.

The debt limit applies to past decisions of Congress. Increasing the debt limit is necessary to
allow the United States to honor obligations previously authorized and appropriated by Congress.
You explained this well in 2010 when you said:

You don’t have much choice if you charge something on your
credit card. You have to pay it, and that’s effectively what this debt
limit is...we’ve already spent the money. The question is now, do
we shut down the government, or do we fund what we’ve already
done?


Increasing the limit does not increase the obligations we have as a Nation; it simply permits the
Treasury to fund those obligations Congress has already established. As James A. Baker, III,
Secretary of the Treasury under President Reagan, informed Congress in 1987:

I should stress that defaulting on already outstanding, validly
incurred obligations has far graver effects than halting operations
of the Government when spending authority is allowed to lapse,
such as when there is a delay in action on appropriations. A failure
to pay what is already due will cause certain and serious harm to
our credit, financial markets and our citizens; it is not remotely
similar to a lapse in authority to incur new obligations. (Emphasis
in original.)

The statutory debt limit is not and never has been, as you argue, a “budget enforcement
mechanism” that can be used to implement spending reductions by selectively defaulting on
obligations previously approved by Congress. Our Constitution provides that “No Money shall
be drawn from the Treasury but in Consequence of Appropriations made by Law.” When
Congress determines that certain commitments in the law should be altered or terminated, those
decisions must be effectuated through enactment of legislation, not by attempting to coerce the
Treasury to renege on existing legal commitments.

Even if the idea of “prioritization” were not so unwise, it would not be a mere exercise in “belt
tightening,” as you suggest. The United States is now required to borrow approximately 40 cents
for every dollar of expenditures. Your proposal would require cutting roughly 40 percent of all
government payments. These deep cuts would be felt by all Americans, and they would risk
throwing the economy back into recession.

You are also mistaken when you state that Treasury has “prioritized” payments in the past. This
is false. Never has Treasury failed to meet any obligation as a result of a debt limit impasse, nor
has Treasury ever “prioritized” payments. Congress has never failed to raise the debt limit when
necessary. It is true that there have been failures at times to enact appropriations legislation, and
this has caused temporary government shutdowns. Specifically, the 1995-1996 furloughs and
suspensions of programs you refer to were caused by appropriations lapses, not a failure to raise
the debt limit. But as Secretary Baker explained, there is no comparison in either cause or effect
between a shutdown and a failure to increase the debt limit.

At its core, your letter is based on an untested and unacceptably risky assumption: that if the
United States were to continue to pay interest on its debt—yet failed to pay legally required
obligations to its citizens, servicemen and women, and businesses—there would be no adverse
market reaction and no damage to the full faith and credit of the United States. Again, this idea
is starkly at odds with the judgment of every previous Administration, regardless of party, that
has faced debt limit impasses.

“Prioritization” also fails to account for how payments of principal would be made if investors
were to lose confidence in U.S. creditworthiness. In August of this year, for example, more than
$500 billion in U.S. Treasury debt will mature. Under normal circumstances, investors who hold

2


Treasuries purchase new Treasury securities when the debt matures, permitting the United States
to pay the principal on this maturing debt. Yet in the scenario you advocate, in which the United
States would be defaulting on a broad range of its other obligations, there is no guarantee that
investors would continue to re-invest in new Treasury securities. In fact, some market
participants have already indicated that they would be disinclined to do so. As one of the major
ratings agencies concluded in a recent report, failure to pay non-debt obligations “would signal
severe financial distress and potentially imminent debt default,” prompting the U.S. sovereign
rating to be placed on “Rating Watch Negative.”

If investors chose not to purchase a sufficient volume of new Treasury securities, the United
States would be required to pay the principal on the maturing debt, and not merely the interest,
out of available cash. Yet the Treasury would be unable to make these principal payments
without the continued confidence of market participants willing to buy new Treasury securities.
Your proposal assumes markets would be unconcerned by our failure to pay other obligations.
But if this assumption proved incorrect, then the United States would be forced to default on its
debt.

I understand that you have a different view of what would happen if the United States were
unable, for the first time in its history, to meet its legal obligations. Nevertheless, I hope we can
all agree that we should not and must not gamble with the full faith and credit of the United
States. The consequences of miscalculation are too grave. The full faith and credit of the United
States is too precious an asset to risk. If you are wrong in your prediction, to quote then-
Secretary Baker, “Future generations of Americans would have to pay dearly for this grave
breach of a 200-year old trust.”

Ultimately, the notion of “prioritizing” payments is futile because the debt limit must be
increased regardless of which spending path is adopted. There is no credible budget plan under
which a debt limit increase can be avoided. In addition, a failure to enact a timely increase in the
limit would have the perverse effect of increasing the government’s borrowing costs and
worsening our fiscal challenges.

For all of these reasons, the idea of “prioritization” has been rejected by every President and
Secretary of the Treasury who have considered it. It is unwise, unworkable, unacceptably risky,
and unfair to the American people. There is no alternative to enactment of a timely increase in
the debt limit. As President Reagan wrote in 1983:

This country now possesses the strongest credit in the world. The
full consequences of a default — or even the serious prospect of
default — by the United States are impossible to predict and
awesome to contemplate. Denigration of the full faith and credit of
the United States would have substantial effects on the domestic
financial markets and on the value of the dollar in exchange
markets. The Nation can ill afford to allow such a result. The
risks, the costs, the disruptions, and the incalculable damage lead
me to but one conclusion: the Senate must pass this legislation
before the Congress adjourns.