StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Debt Ceiling May Come Crashing Down on Treasury

09 May 2011
Posted by Bruce Bartlett
Published in The Fiscal Times on May 6, 2011
On Monday, Treasury Secretary Tim Geithner notified Congress that the public debt limit will become binding within two weeks and Treasury will no longer be able to borrow additional funds. Nevertheless, Congress is taking its time on raising the debt limit, with some lawmakers still saying they will not vote for an increase under any circumstances. This is a clear shirking of their responsibilities, the nation’s finances, and the well-being of every American.
Members of Congress opposed to increasing the debt limit are like people who give their credit cards to a friend, telling them to buy whatever they like. Then they refuse to pay the bill in order to punish their friend for overspending. But their friend still has whatever was bought with the credit card and the only ones being punished are the shareholders of the credit card company, whose profits will be lower because one of its cardholders is fundamentally dishonest.
At the risk of belaboring the obvious, the federal budget deficit didn’t just suddenly arise solely because of actions taken by Democrats over the last two years. As a recent report from Pew makes clear, the bulk of it results from a recession that began in December 2007 and actions taken by Republicans when they were in power: huge tax cuts, two unfunded wars, and new spending programs such as Medicare Part D. Furthermore, Republicans themselves admit that even if their budget plans were enacted in every detail and spending is slashed, the government would still run deficits of more than $5 trillion over the next 10 years; that is what would result from the budget drafted by Rep. Paul Ryan, which all but 4 Republicans in the House voted for on April 15.
For the record, these are the deficits that House Republicans officially support (fiscal years): 2012: $995 billion; 2013: $698 billion; 2014: $489 billion; 2015: $431 billion; 2016: $478 billion; 2017: $407 billion; 2018: $378 billion; 2019: $415 billion; 2020: $405 billion; and 2021: $391 billion.
To vote for $5 trillion in additional deficits – not to mention all of the legislation that got us to today’s deficit – and then oppose allowing the Treasury to borrow funds to cover the lost revenue from tax cuts and the spending Congress enacted into law is nothing but reckless grandstanding.
It’s reckless because failure to raise the debt limit not only threatens a default that could potentially roil the entire world financial system, but would potentially deprive federal workers of their salaries, deny payments to businesses for goods and services sold to the federal government, renege on Social Security benefits to retirees,  and shortchange savers who depend on interest income. 
It is difficult to explain the vastness and variety of payments the Treasury must make every working day. On Monday, May 2, it paid out $6.4 billion in interest on the debt, $4.5 billion to retired federal workers, $3.7 billion to military retirees, $2.6 billion to house the indigent, and $1.6 billion in federal salaries, among other things. On Tuesday, May 3, the Treasury paid $21.8 billion to Social Security recipients, $1.6 billion to Medicare providers, and $1.6 billion to vendors that sold supplies to the Department of Defense.
Most days, the Treasury does not take in enough in taxes to cover its payments. On Monday, it took in almost $26 billion, but on Tuesday it took in less than $4 billion. Through Tuesday, the Treasury has received a little less than $1.3 trillion in taxes for fiscal year 2011, but has made payments of almost $7 trillion. The reason the payment number is so large is because it includes funds that were paid to Treasury’s lenders, whose securities matured and needed to be paid off.
Redemptions to owners of Treasury securities eat up a vast amount of its cash on a day to day basis. On Monday, it needed $316 billion to redeem various bills, notes and bonds, and on Tuesday it redeemed another $265 billion. Through Tuesday, Treasury has redeemed close to $40 trillion of maturing securities in fiscal year 2011. In almost all cases, these securities were rolled over; in effect, the Treasury simultaneously paid to and borrowed from the same people and institutions.
But of course, because the federal government runs a budget deficit, the Treasury must borrow a little more on most days. On Monday, there was a net increase in Treasury borrowing of $33 billion, on Tuesday the increase was $11 billion. This is how much the national debt increased on those days. As of May 3, the total amount of debt outstanding was $14,280,140,000 and the debt limit is $14,294,000,000.
Obviously, there is little room to spare and beginning today, May 6, the Treasury will start suspending certain payments that can legally be put off. If the debt limit is not raised by May 16, it will suspend other payments. Treasury estimates that by August 2, it will run out of maneuvering room and default on the debt will become unavoidable.
Many conservatives say that as long as it has sufficient monthly cash flow from taxes to pay monthly interest on the debt then the Treasury can just stop making payments to doctors and hospitals that provide Medicare services, stop paying salaries to federal workers, stop paying vendors that provide food and ammunition for our troops in the field, and, above all, stop paying Social Security benefits.
How the Treasury will decide who gets paid and who doesn’t is a complete mystery and a problem that no conservative to my knowledge has given a second’s thought to. There is no law allowing it to prioritize payments except in a couple of very limited cases, which it will begin using shortly. In any event, it is a very bad idea to give the Treasury secretary the unilateral power to decide who and when those who are owed money by the federal government will get it.
Although some people argue that Social Security benefits are not jeopardized as long as there are sufficient assets in the Social Security trust fund, they don’t understand that securities held by the trust fund are not marketable, and if Treasury can’t borrow it won’t have the cash to redeem them. That is why Congress had to pass a special law back in 1996 allowing the debt limit to be increased by the amount needed to pay Social Security benefits during an earlier debt limit impasse.
The real issue with the debt limit isn’t whether the government should run a budget deficit or if the deficit is too large. It’s about cash flow and making sure that the Treasury has enough on a daily basis to pay its bills and neither inconvenience nor break faith with those who sold goods and services to the government, loaned it money, or depend on federal programs for life and health. The word “irresponsible” is inadequate to describe those in Congress who use doubletalk to justify refusing to raise the debt limit.

Great info, great article.

Great info, great article. Scary situation.

Missing a set of zero's on those total debt numbers?

Thanks for helping me "get it"

Bruce -

EXCELLENT post, and THANK YOU for helping me understand re dates, and why this is important NOW. Even though I don't live far outside the Beltway, like most Americans my mind is on other things, and after a while one tunes out the highly partisan back and forth, unless you're a die hard partisan, or the different dates get one confused and tune out again. The SPECIFICS actually do help. I'll be checking in re JB's talk to Wall Street that Pete mentioned as I'd be shocked if he in fact said those things publically. It also seems like quite a hat trick to pull this off in 2 weeks or whatever, although the 2011 budget did finally go through. Per you and Stan, no way, no how re Tea Partiers.
FYI, re Part D - you can tell it was part designed by BIO because after about 10K in expenditures the federal governemnt is on the hook. I don't know if there's a single biotech drug that is under 10K a year and oral cancer drugs can be upwards of $25K per treatment regimen (6 months) and biotech drugs are frequently used in combination (Rheumatoid Arthritis, Multiple Sclerosis). Cutting the donut whole in half wasn't just about seniors; it also reduces the incentive to start and stay on generic drugs, which are far less expensive.

are there any sane Republicans?

I have been a Republican all my life. It seemed like the reasonable thing for a market-oriented economist to be. If the idiots in Congress screw up this debt ceiling business, I cannot vote Republican in any national elections ever again. What in the world can they be thinking?

maybe I'm just affected by the skepticism of a skeptical age...

But it seems to me the answer is no, JLM, there are no sane Republicans.

"It seemed like the reasonable thing for a market-oriented economist to be."

Can you explain that a bit?

As someone under 35, who was studying economics during Clinton's presidency and has only really known the Democratic Party of Clinton & Obama, I really have a hard time understanding that assertion.

Clinton did quite a bit more to lower barriers to trade than Bush did (partly, of course, because they were already gone by the time Bush came into office). I've never seen a Democratic Party that has anything bad to say about free-market capitalism.

The GOP that I know-- of Gingrich, Bush Jr., McCain, Sarah Palin, etc.-- has never seemed to me to be particularly interested in economics. They all seem to believe that cutting revenue magically balances the budget (or, in Cheney's case, that "deficits don't matter"), and that health insurance policies that they favored a few weeks before Obama endorsed them are actually socialism and therefore fascism. Today, as we face low rates on gov't bonds, low inflation, OECD-average debt levels, and catastrophic unemployment, the Republican Party wants to purge the rottenness out of the system, or perhaps bleed the economy with leeches.

Based on what I've seen of the GOP-- a party that favors tactics & talking points over policy every time-- playing chicken with the currency & the economy is exactly what I'd expect.

Sorry but Democrats are the

Sorry but Democrats are the party of regulation and controls of prices and movement of prices -- rent controls, minimum wages, land use controls, regulations without care to see whether they are worth their economic cost, etc. That's all bad microeconomics.

No, the Democrats "were" the

No, the Democrats "were" the party of all those things. With the exception of raising the minimum wage, when was the last time a Democrat actually in power, not some wonk in a blog, proposed price controls or regulations that didn't stem from actual recent negative events brought on by no regulations? This is not the Democratic party of 1968, yet the Republicans want to solve our nations problems with the 1980 perscription that no longer makes any sense. Do you really believe high taxes and an over-regulated business sector are what is causing our current national problems? It's like the last 30 years of history didn't happen. Reagan pulled us back from an economy that WAS over-regulated and over taxed and by and large Bush I and Clinton went along with that viewpoint, sometimes taxes have to go up on the margins sometimes new regulations are necessary because the unforseen crops up, but otherwise everything went along great. Then Bush II decided the only way to run the country was to double down on everything Reagan had done, even though those problems no longer existed, but still keep all the great spending everyone liked and start two wars. I will take the economic stagflation of the '70's over what is waiting for us if the GOP doesn't smarten up and allow tax increases, or even better a VAT, to become part of a 2 for 1 solution to our looming budget problems. We cannot cut enough to make up the shortfall - taxes have to go up not because we like taxes, but because sometimes you have to take poisonous chemicals to get rid of a more dangerous cancer. Only Democrats are in a political position to make these sensible choices because the Tea Party has killed the GOP. The Tea Party has become the Christian Scientists of the Republican party saying that we don't need any medicine and god will cure us - good luck with all that.

Congress has passed laws

Congress has passed laws telling the government how much it can tax, how much to spend, and how much it can borrow. Just like Quick, Effective, and Under Budget, you can have any two. Stiffing bondholders, stiffing empoyees, or retiree, or suppliers, or those waiting for tax refunds: barring guidence from courts, if all actions are equally illegal, they are all possible. When the immovable object is hit by the unstoppable force, SOMETHING'S going to give. The Republican seem to have an unwarranted certitude of which one it will be.

Power of the purse?

During the 2011 budget expiration crisis, contractors working in government offices were going to come to work and be paid. While the military was to work and not to be paid and civil servants planned to stay home.

How can treasury not pay an obligation established by a valid contract and funded by an appropriation?

During Reagans massive outlays for new weapons I worked on one which the government guys tried to let expire. A letter from congress reminded the Sec Def that an appropriation is law and the weapon we were trying to let expire was in the bill.

We were on contract over the weekend.

Contracts are controlled by

Contracts are controlled by obligation authority. That's in the appropriation bill. Payment is based on cash in the bank. If there isn't cash, having a contract based on an appropriation is no defense. I would assume that Treasury would stiff interest payments to government accounts (trust funds, Federal Reserve), then contractors, then various sorts of government employees, then SS recipients, then US bondholders, then foreign and international bondholders. I probably have the order of stiffing out of whack and would appreciate experts doing corrections.

End Times Financial Terrorism

The Republicans are looking more and more like they have a death wish for our economy.

Or, maybe they are just trapped by their own rhetoric. This piece was targeted at state level,
but same thing is happening at Federal:

This will not be good for them in 2012.

Ultimately the middle prevails, and they have moved dangerously far from it.

How does this play out?

Thanks for the nuts and bolts details, which really underline how deeply routine government operation depends on borrowing. In that, it's really not so different from most businesses, which also depend day-to-day on credit.

I want to go in two different but complementary directions. First, what's the political endgame likely to be? Maybe some kind of deal, but Boehner sure doesn't make it sound likely and the teapers really do want a showdown. If they get it, Obama/Geithner can start cutting payments and try to make the pain stick on the GOP caucus; the more they succeed at that, the more the teapers are going to want to push it, I think, because for the core who want this, it isn't about finance but morality.

Say we get closer to August and big finance prevails on enough republicans to cave. Well, they're dead meat in the primaries next year, aren't they? And we'll see what happens to the republican brand going forward.

But suppose that doesn't happen, August looms, and Obama does what you propose-- ignores the debt limit. One track is that they could sue him and/or Geithner and fast-track to the Supreme Court. There I think the result is anybody's guess. It's true they've been deferential to executive power recently, but it was mostly the bush executive. I don't doubt that Alito and Roberts in particular, the most indulgent of bush executive power, will vehemently oppose this administration. And the outcome: If the admin wins in court, executive authority expands. If it loses, impeachment is next.

But this court path will take too much time. If Obama ignores the debt ceiling I think they'll impeach him in a heartbeat (and I don't believe it's unthinkable that some people have been trying to use this to get there all along). There is a group that's been itching to impeach him, don't you think? They might even do it over Obamacare if they get the ruling they want on that.

Impeachment'll tie up congress in even bigger knots and he wouldn't be convicted anyway, with the result that practically speaking, executive authority will expand even further. So either way the executive wins and congressional authority loses.

The second track-- Why do this anyway? As you say, they're nuts and fanatics. Most of the ordinary voters who support this showdown have no idea how the borrowing works and have no experience with anything beyond their checkbooks, if that. It's all about the moralism for them, and in this part of the world the big points are "spending money we don't have" and that Obama is in the White House. Any Democrat, really, because since at least Carter they've never accepted any Democrat as legitimate, but particularly Obama for obvious reasons. He symbolizes too directly the diminished opportunities the teapers' kids and grandkids face, in my view.

I couldn't agree more that the moralism in reality works the opposite way, ironically so. We've already spent that money, gotten those services, made those promises, and the republican caucus made the bulk of those commitments. Reneging on those commitments, or even calling them into question, just isn't moral. But that isn't how these guys think.

If it comes to it, I'll be curious to see what they think is happening when their Social Security checks stop coming. My bet is that they'll accuse Obama of persecuting them for their political opinions!

Obama can let the GOP fall on it's sword

Obama says "I'll only sign a clean debt ceiling Bill". Then the GOP either folds or crashes the economy; either way they lose.

If the GOP tries to crash the economy, Obama can let everybody feel some pain and then say "I've got a legal opinion that says I don't need the debt ceiling raised; I'm reluctant to use it, but it is the prudent thing to do because the GOP is simply crazy." and he saves the day.

How can the GOP win in 2012 under any scenario?

Somehow I don't think it's a

Somehow I don't think it's a moral issue for the men behind the astroturf curtain - I think they're thoroughly amoral. What's in it for them (as opposed to for the republican party)? I honestly don't know. But there's something about the whole state and federal deficit hysteria that seems like someone wants to liquidate all public assets, perhaps so the private sector can buy them at bankruptcy-auction prices. Is there some parallel to a hostile takeover? Do I need to go breathe into a paper bag again?

Prioritizing Payments


You wrote:

"How the Treasury will decide who gets paid and who doesn’t is a complete mystery and a problem that no conservative to my knowledge has given a second’s thought to. There is no law allowing it to prioritize payments except in a couple of very limited cases, which it will begin using shortly. In any event, it is a very bad idea to give the Treasury secretary the unilateral power to decide who and when those who are owed money by the federal government will get it."

Actually, Senator Bill Toomey has given a lot of thought to this problem, and he has introduced legislation to provide guidance to the President on what should be a priority. If I were President, this is how I would prioritize payments:

1. interest and principal on publicly held debt.
2. payments necessary to support armed forces deplyed in the field and overseas, and providing logistical support.
3. Departments of Justice, State, courts, Congress, most Homeland Security etc.
4. FAA, CDC, and other agencies with health and safety responsibilities
5. Social Security
6. Medicare
7. Medicaid
8. Everything else

This isn't rocket science. It simply requires an explicit statement of priorities of the core functions of the federal government. Payments to NPR, Planned Parenthood, Depts. of Labor, Commerce, Education, HHS, and HUD are to agencies with counterparts at the state level. The nation will go on just fine if all those agencies shut down for a few months while states pick up whatever slack they feel needs picking up. Most of Medicaid will probably go unfunded too. But the first 7 items can be mostly covered with existing tax collections.

You can scream and stomp your feet all you want, but the international financial markets are yawning at all this Cassandra-like hyperpole.

Priority Principles

DebtRefer, I'm curious to know what fundamental principle guides your distinction between two government promises: 1) the promise to return borrowed money with interest; and 2) the promise to pay SS benefits that the payee has worked for a minimum of 10 years, and often over 35 years, to receive. The first you put as #1, the second is at #5.

Both are legal obligations on the day payment is due. Both involve payees who have given money to the government based upon the promise of its return. True, the former often benefits the very wealthy and, in 50% of all government bonds, foreign investors and central banks --- whereas the latter benefits only the average American citizen. But I am not going to assume that is the distinction you make --- or should I?

No, I think most people who think as you do believe that payments on national debt are sacrosanct because otherwise we would run out of borrowing power. After default, nobody would lend to us, at least at today's low rates. In contrast, you believe that everybody else who is contractually entitled to be paid have no such leverage if they don't get their checks.

I think you are correct, but only until the next election cycle. The market will punish a bond default overnight, as we are seeing in real time in Greece, Ireland, Portugal and, soon, Spain. But the electorate will punish an entitlement default at the next election, just as we are seeing in real time in Greece and Ireland. For that reason, those who call for prioritzing payments, rather than an orderly and across-the-board budget cut and tax increase, are not likely to lead in the future.

Couldn't this get political?

If the Republicans force the debt ceiling, then would that leave Obama and Geithner with the purse strings? Why wouldn't Obama focus spending then on Democratic priorities, and let Republican priorities go unfunded?

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