StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Don't Believe The Scary Words You Hear About The Debt Ceiling

11 Jan 2011
Posted by Stan Collender

Much of what being said about what happens if the federal debt ceiling isn’t raised immediately when the current borrowing limits is reached is just wrong.  My column in this week’s Roll Call tries to correct the misinformation, misunderstanding, and...well...lies.

Don’t Believe What’s Said About Debt Ceiling
There is so much misinformation and grossly misleading talk about what will happen if the federal debt ceiling isn’t increased that, before any more unnecessary bloodcurdling language is used that increases everyone’s anxiety, it’s worth taking a few steps back from the edge.
First, not raising the current federal debt limit absolutely will not immediately shut down the federal government. In fact, the federal debt ceiling has virtually nothing to do with whether federal departments and agencies continue to operate. Borrowing is just one of the ways the federal government finances its activities, and not increasing the debt ceiling only eliminates one of them. The talk about the government being shut down if there’s no increase in the debt ceiling when the current level is reached in the next few months is either a gross misunderstanding of how the federal budget world works or a scare tactic. The first is merely unfortunate; the second is absolutely infuriating.
Government shutdowns occur when the appropriation that funds a department or agency isn’t enacted. In fact, unless the Treasury or the Office of Management and Budget informs them, federal departments and agencies likely have no idea about the government’s cash position or where the cash came from when they obligate funds and carry out the activities funded by their appropriation. The agencies and departments are legally required to conduct these activities; gathering the cash to pay for them is a completely separate process.
Second, and again contrary to what some have stated as gospel, reaching the debt ceiling will not automatically lead to a federal default on the nation’s existing debt. That will only stop the government from borrowing more than the current limit and force it to rely on other ways to finance its activities.
Although the comparison isn’t perfect, the situation is similar to what happens when individuals max out credit cards. They don’t stay home with the lights off, gently rocking back and forth in a corner; they find other sources of money or change their activities to match the cash available. That could mean delaying paying a bill, taking cash from a savings account, getting a loan from a family member or friend, waiting for the next paycheck, or selling a car or some other possession. If they make a payment to bring their maxed-out credit card below the limit, they can borrow again, too.
In a letter last week to Speaker John Boehner (R-Ohio) about the debt ceiling, Treasury Secretary Timothy Geithner mentioned that the federal government has an equivalent to each of these things. What Geithner didn’t mention is that the federal government also has a number of other tactics, such as leasing an asset — the federal equivalent of renting out a room in your home — or significantly slowing down payments to government contractors and others. These additional tactics may not have been used in the past and may be disheartening or even embarrassing to some, but they are available to avoid a crisis.
Third, if a standoff on raising the debt ceiling lasts for a significant amount of time, the alternatives to borrowing eventually may not be enough to provide the government with the cash it needs to meet its obligations. Even at that point, however, a default wouldn’t be automatic because payments to existing bondholders could be made the priority while payments to others could be delayed for months. There’s no way to know, however, what “eventually” means because the government has never had to resort to such extreme cash management practices. It could be months.
Fourth, all of this means that those who think refusing to increase the federal debt ceiling when it is reached later this year will force the White House to accept budget changes will likely find the administration surprisingly unmoved, perhaps for months to come. If the administration is willing to use all of the cash management techniques available to it, the biggest negative reaction will likely come from Wall Street and those whose payments are delayed. Uncertainty in the schedule for auctioning Treasury securities will upset the bond market and it may express its unhappiness both rhetorically and with higher interest rates.
But the confrontation is far more likely to be a war of words than an actual battle over the budget with both sides fixated on blaming the other. That’s why those who have been forecasting an epic political spectacle because of the debt ceiling are likely to be disappointed and frustrated.

Uncertainty in the schedule

Uncertainty in the schedule for auctioning Treasury securities will upset the bond market and it may express its unhappiness both rhetorically and with higher interest rates.

I'm old enough to remember when republicans claimed uncertainty was bad for the economy

That’s why those who have been forecasting an epic political spectacle because of the debt ceiling are likely to be disappointed and frustrated.

You say that as if it were a bad thing

California recently faced these issues and issued scrip and IOUs for quite a while.

I'll be the first to admit

That I've believed much of what's been said about what would happen. Hope you're right 'cause it's probably going to happen.

The government won't default

The government won't default on loans. It'll just stiff all its vendors instead! Color me relieved.........

Yes and no

You are absolutely correct that the government will not instantaneously shut down and simultaneously default on its debt the instant the ceiling is reached.

However, given the size of the deficit relative to the overall budget, it will not be long once that ceiling is reached before painful choices (like do we make interest payments or do we pay soldiers' salaries) have to be made.

Debt ceiling

Aren't the "alternatives to borrowing" you mentioned just different ways to borrow? E.g., leasing an asset (aka "lease financing"), delaying payment to suppliers (aka "supplier credit"), etc. Perhaps these alternative forms of borrowing do not technically breach the debt ceiling. Nevertheless, they are alternative forms of debt.

Thank you, Stan.

It's about time somebody said this! By being intellectually afraid to explore the consequences you mention, we are bound to continue down the path that has gotten the federal fisc to this point.

Another creative approach might be to consider that the government could meet all of its obligations on public debt (approx $9.3T) and only default on intragovernmental debt (i.e. interest that it owes itself). This would obviously force a restructuring of the entitlements/trust funds that are a large part of the problem.

Wisdom of the Ages hauled out & dusted off

@foosion said, “I'm old enough to remember when republicans claimed uncertainty was bad for the economy”

Yeah, it was all over the intertoobs and airwaves way back in October 2010. As was the problem with Speaker-managed debate, and straight party-line voting by the majority.

But NOW, it's important to Make A Partisan, Closed Statement About Debt, although not the kind of debt that ACA would reduce.

Wisdom of the Ages, indeed. Personally, when I watch ancient theater I prefer the Greek classics.

Amendment 14, Section 4 says no to default

The US Constitution instructs (A14-S4) that US debt must not be questioned. Presumably this can be interpreted as saying the debt must be serviced (otherwise that section would have no meaning). Should Congress refuse to raise the debt ceiling, the President would simply instruct the Treasury to issue new money for this purpose, which would be fully within the authority granted by the Constitution to the federal government. I suspect that if the President did not do this (i.e., allowed default), the investors would quickly sue, and would receive satisfaction from the Supreme Court.

Yup, Benedict, there is a lot

Yup, Benedict, there is a lot of case law supporting this view, relying on that 14th Amendment clause ( & on the 5th Amendment too).

An old gold standard case, Perry v US, 1935 was very close to the bond investor suit scenario: Perry had a US bond & wanted to be paid in gold after the US went off the gold standard and made private ownership illegal. Though managing to not leave Perry too happy, the court said then that "the national government is not at liberty to alter or repudiate its obligations" . The President acting as you say would be the logical legal way to proceed if there were no other way to pay such constitutionally mandated payments, and the investors would have an overwhelmingly strong case.

Debt Ceiling

Stan, you are exactly right that the debt ceiling is about cash, not budget authority. I remember past debt ceiling issues where the issue was about not cutting checks. Obligations could continue, so government shutdown was not required. Looking at the history of debt ceiling "crises," it seems clear that the Executive Branch holds the best cards. You may recall President Clinton in 1996 response telling congress that, without a debt ceiling increase, he did not have sufficient cash to pay social security recipients on March 1st. Congress quickly passed a bill authorizing the Treasury to sell securities, which would not count against the debt ceiling until March 15th, equal to the amount of the March social security payments. The maneuvering did continue on, but ultimately the Congress passed the debt ceiling increase. it's all a question of who doesn't get paid, and the Executive Branch has a lot of control over that.

U.S. debt ceiling

On reading many comments and not just on this blog, many commenters seem to think that SCOTUS rulings have the force of law. A proper reading reading of our constitution requires Congress to make laws, SCOTUS to provide decisions, and the Executive to enforce the law. The latitude to determine the constitutionality of any law of Congress or ruling of SCOTUS or Executive directive is given to each branch independently of the others with the ultimate control of constitutionality being determined by Congress, not the Executive nor the Judicial (read impeachment provisions). The POTUS does not have to implement any SCOTUS ruling if it does not want to. Of course, the branches need to get along in order to govern effectively but that is not a constitutional problem but a political one.


I see your point, but won't the Federal government run over $100 billion a month in deficit after the new tax cuts ($1 trillion base + >$300 billion for latest tax cut & stimulus bill). We are talking about a deficit equal to 9% of the nation's GDP! I don't work AP at the Treasury, but it seems like that is too much money to stall for long. Maybe a month? Particularly since I think most of the government expenditures are for pension/social security payments, medical bills, and employee salaries. Delaying those payments would create an uproar.

Wouldn't the Fed just print

Wouldn't the Fed just print money to make up the difference? Doesn't the GOP hate inflation more than the Dems? Doesn't that mean there won't really be a standoff, irrespective of appearances and posturing?

How about some factual coverage about what happened last time

The interesting thing is that no one is talking about what happened the last time the US defaulted. I happened to be one of the unlucky people who had a T-bill mature at a canceled auction. I didn't get a check for the amount the federal government owed me. A week later, when the debt ceiling was raised my T-bill rolled over, but I did not get paid interest for that week. This time I hope someone instructs the Fed how to deal with the default. Last time the Fed defaulted the auction was supposed to be on Wednesday, I called the Fed the following Monday. The Fed had absolutely no idea when or if I would ever get my money back, and the person I talked to was very scared when she found this out from her boss. I ended up calming her down.
I think freezing the debt ceiling is a good thing, but let’s not just play a game of chicken without planning for the consiquences.

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