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Must-Read: Bruce Bartlett On The Debt Limit

08 Oct 2013
Posted by Stan Collender

Capital Gains and Games alum Bruce Bartlett last week wrote a piece in Tax Notes on the debt ceiling that absolutely is must-read. I'm posting it here in its entirety with Bruce's permission and my strong recommendation that you take a few minutes to read it. 

The Dangers of Debt Limit Brinksmanship

In a few weeks, the debt limit will be breached as all of the Treasury’s “extraordinary” measures are exhausted and there will be insufficient cash to pay all of the government’s expenses as they come due. These include payments of principal and interest on the debt. Therefore, default on the debt is almost inevitable unless the debt limit is raised in a timely manner.

While the debt limit and potential debt default don’t impact on tax policy directly, they are important indirectly. If the U.S. Treasury’s ability to borrow is inhibited by a default, that would cause investors to shun Treasury securities and raise interest rates, this will put increased pressure on the budget to raise revenue. That is why Alexander Hamilton discussed the consequences of default in Federalist 30, which relates to the federal government’s taxing power. Said Hamilton:

In the modern system of war, nations the most wealthy are obliged to have recourse to large loans. A country so little opulent as ours must feel this necessity in a much stronger degree. But who would lend to a government that prefaced its overtures for borrowing by an act which demonstrated that no reliance could be placed on the steadiness of its measures for paying? The loans it might be able to procure would be as limited in their extent as burdensome in their conditions. They would be made upon the same principles that usurers commonly lend to bankrupt and fraudulent debtors, with a sparing hand and at enormous premiums.

Especially at a time of war, any threat to the Treasury’s financing is a threat to national security. And, lest we forget, the nation is still at war in Afghanistan. Additionally, the recent Syria incident shows that the threat of new hostilities is ever-present. Nor should it be forgotten that 47 percent of the debt held by the public is now owned by foreigners. One can assume that they will not take kindly to any interruption in their interest or principal payments.

The threat of debt default and its impact on national security was very much on the minds of those who drafted the Fourteenth Amendment to the Constitution. The historian Franklin Noll has explained how representatives of the former Confederate states, now back in Congress, were highly disinclined to tax their constituents to pay the debts of the Civil War’s victors – the Confederate debt was repudiated, only the Union debt was repaid. Consequently, the threat of default was a very real one in the immediate postwar period.

To protect against the danger of default, the drafters of the Fourteenth Amendment included the little-known section 4, which reads:

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

A number of legal scholars have concluded that this provision makes unconstitutional any law that would call into question or threaten the payment of interest or principal on the debt, including the debt limit. Only some of this work is in law reviews (Abramowicz 2011, Buchanan & Dorf 10-12, Buchanan & Dorf 12-12, Charles 2013). Most appears on legal web sites such as Balkanization, which is hosted by Yale law professor Jack Balkin; Dorf on Law, which is hosted by Cornell law professor Michael Dorf; and Verdict, a group blog.

In fact, there is almost no serious legal commentary explaining why section 4 of the Fourteenth Amendment doesn’t simply invalidate the debt limit. But that which exists has had inordinate influence; in particular, Harvard law professor Lawrence Tribe’s op-ed article in the New York Times on July 8, 2011. Among those apparently influenced by this article is Barack Obama, who studied under him at the Harvard Law School.

Government lawyers, not surprisingly, agree with whatever the president thinks. A few days after the Tribe article appeared, Obama was asked what he thought about using the Fourteenth Amendment in the event that Congress refused to raise the debt limit. At a town hall event, he said:

There is – there's a provision in our Constitution that speaks to making sure that the United States meets its obligations.  And there have been some suggestions that a President could use that language to basically ignore this debt ceiling rule, which is a statutory rule.  It’s not a constitutional rule.  I have talked to my lawyers.  They do not – they are not persuaded that that is a winning argument.

Former President Bill Clinton, however, has said publicly that he disagrees with Obama and that the Fourteenth Amendment gives him the constitutional authority to resist congressional extortion via the debt limit. In a July 11, 2011 interview with The National Memo, an online publication, Clinton said if he were in Obama’s shoes he would ignore the debt limit “without hesitation” to prevent a debt default and “force the courts to stop me.”

Not being a constitutional lawyer, I won’t weigh-in on the merits of the constitutional argument. But I think it is important to recognize that should Congress fail to raise the debt limit in a timely manner, President Obama will have no choice but to break the law; the only question will be which law to break.

This is a point that has been emphasized by law professors Neil Buchanan and Michael Dorf. They point out that the law does not permit the Treasury to prioritize payments or to decline to pay some so that others can be paid. Nor does the president have the legal authority to unilaterally raise taxes to pay debts that are due. Ignoring the debt limit would also be a violation of law, but Buchanan and Dorf argue that doing so is the least unconstitutional option.

On the other hand, Prof. Howell Jackson of the Harvard Law School argues that prioritizing payments is the least unconstitutional option. In a 1985 opinion, the U.S. Government Accountability Office supported this view. But it is worth noting that congressional Republicans apparently do not believe the president has inherent authority to prioritize payments and thus have voted for legislation to give him that authority. H.R. 807, the “Full Faith and Credit Act,” passed the House of Representatives on May 9, 2013 by a vote of 221 to 207. There has been  no action in the Senate.

Previous presidents have also faced the dilemma of being under insurmountable pressure to act in various circumstances with no clear legal authority or conflicting legal demands. Thomas Jefferson concluded that he did not have the authority to buy the Louisiana territory, but did so anyway because it was essential to the national interest.

During the Civil War, Abraham Lincoln often had to take extra-constitutional actions, such as suspending the writ of habeas corpus. In a message to Congress on July 4, 1861, he explained that when forced by grave necessity to break the law, the president must do so, choosing the least unconstitutional option. As Lincoln put it, “To state the question more directly, are all the laws, but one, to go unexecuted, and the government itself go to pieces, lest that one be violated?”

Franklin D. Roosevelt suspended the enforcement of gold clauses in private contracts fully expecting that the Supreme Court would rule against him.

As an economist, my primary concern is the impact on the economy and interest rates of a debt default, which many Republicans in Congress poo-poo as nothing to be too concerned about. In this respect, I think the views of financial market participants should carry special weight. In the run-up to the 2011 budget deal, which narrowly averted a debt default, a number of top Wall Street economists and executives weighed-in on the potential economic and financial consequences.

In an April 2011 note, J.P. Morgan published an extensive analysis of the “domino effect” of a U.S. default that would spread far beyond those that own Treasury securities. As it explained:

 

Our analysis suggests that any delay in making a coupon or principal payment by the Treasury – even for a very short period of time – would almost certainly have large systemic effects with long-term adverse consequences for Treasury finances and the U.S. economy. These effects would be transmitted through three primary channels: U.S. money funds, the repo market, and the foreign investor community, which holds nearly half of all Treasury securities. Our main conclusions are as follows:

 

          A technical default raises the risk of a flight to liquidity out of             government money funds, potentially triggering an increase in             redemptions similar to that seen in 2008.

 

          Repo markets will be severely disrupted as haircuts are raised and      could result in a significant deleveraging event.

 

          Even if the technical default is cured immediately, foreign demand for Treasuries could be permanently impaired. As a case in point, we note that even without any kind of default, Fannie Mae and Freddie Mac’s move into conservatorship has led to permanently lower foreign sponsorship of GSE [government-sponsored enterprise] debt.

 

The report said that default could raise yields on Treasury securities significantly and that this impact could last for years owing to permanently reduced foreign demand. It noted that in 2000, the nation of Peru chose for political reasons not to make a debt payment that was due. Although the payment was later made and Peru’s credit rating restored to its previous position, yields on Peru government securities remained about 50 basis points higher for some time thereafter.

 

Something similar happened in the U.S. in 1979 when the Treasury briefly defaulted. Owing partly to Congress’s failure to raise the debt limit in a timely manner and some problems with Treasury’s equipment for printing checks, some payments that were due on May 3 and May 10 were missed. By May 17, all payments had been made and the Treasury was current with all bondholders. Nevertheless, yields on Treasury bills rose 60 basis points and stayed higher for years.

 

In a letter to Treasury Secretary Timothy Geithner on April 25, 2011, Matthew Zames of J.P. Morgan, then-chairman of the Treasury Borrowing Advisory Committee, said, “Any delay in making an interest or principal payment by Treasury even for a very short period of time would put the U.S. Treasury and overall financial markets in uncharted territory, and could trigger another catastrophic financial crisis.”

 

In a survey of its largest clients, J.P. Morgan found that they were expecting a 37 basis point rise in yields on the 10-year Treasury security in the event of a temporary default. However, because they are more risk-averse, foreign investors said they expected a larger yield increase of 55 basis points. Such an increase in yields would raise Treasury’s annual borrowing costs $10 billion in the short run and $75 billion per year in the longer run as maturing debt turns over.

 

In a May 18, 2011 report to its clients, Morgan Stanley economists took issue with the view that Treasury can stop paying all the rest of its bills, including Social Security benefits, and simply prioritize payments to debt holders, thus preventing a default. The report said that this is a highly impractical solution to the problem. As it explained:

 

Some have argued that the Treasury can manage its cash in a way that avoids default. For example, see the Wall Street Journal op-eds by Senator Pat Toomey and former Treasury official Emil Henry. However, the approach that they are advocating does not seem at all workable to us. The Treasury’s cash flows are too lumpy to simply prioritize one form of spending over another. For example, we would expect a significant political outburst if the Treasury withheld monthly Social Security checks at the beginning of the month (even though there was sufficient cash on hand to make the payments) just in case they needed this cash to make debt service payments at mid-month. Such a scenario is highly impractical – and probably not even legal.

 

On June 14, 2011, Federal Reserve Board chairman Ben Bernanke warned Congress about the dire economic consequences of failure to raise the debt limit. As he said:

 

Failing to raise the debt limit would require the federal government to delay or renege on payments for obligations already entered into. In particular, even a short suspension of payments on principal or interest on the Treasury's debt obligations could cause severe disruptions in financial markets and the payments system, induce ratings downgrades of U.S. government debt, create fundamental doubts about the creditworthiness of the United States, and damage the special role of the dollar and Treasury securities in global markets in the longer term. Interest rates would likely rise, slowing the recovery and, perversely, worsening the deficit problem by increasing required interest payments on the debt for what might well be a protracted period.

 

Treasury’s cash inflow almost never matches outflow on a daily or even monthly basis. And, as the Morgan Stanley report notes, it is simply not tenable for the Treasury to withhold Social Security payments to make interest payments that may not be due for weeks. (The curious should examine issues of the Daily Treasury Statement to see just how variable Treasury’s tax receipts and payments are.) This point was made by Morgan Stanley economist David Greenlaw in a July 8, 2011 report:

 

Debt prioritization is not a realistic option.  It is being advocated by people who simply do not understand Treasury cash flows. While it is true that the government takes in a good deal more in receipts than it pays out in interest on the debt over the course of a full year, on certain days the government takes in much less than it pays out. For example, the Treasury has an interest payment of about $30 billion due on August 15. On that day, it will take in about $15 billion in tax receipts, so it won't even have enough to make the interest payment alone. Are the proponents of prioritization suggesting that the Treasury should withhold all of the $22 billion social security payment due on August 3, so it can cover a debt service interest payment that is due a couple of weeks later?  If so, what is the legal basis for Treasury to do this?

 

Finally, on Social Security, it is sometimes said that the payment of benefits is never a problem as long as there are sufficient assets in the Social Security trust fund to pay them. The problem is that the Treasury securities in the trust fund are not marketable. If the Treasury lacks the cash to redeem the securities itself there is no practical way of obtaining the cash to pay benefits in the event that the debt limit becomes severely binding. That is why in 1996 Treasury insisted that Congress raise the debt limit sufficiently to cover Social Security benefits or those due on March 1 could not be paid. Of course, Congress did so.

 

Getting back to the potential problems in financial markets, many Wall Street analysts emphasize the unknown factor. As financial relationships have become more complicated, the full implications of a severe shock to the system cannot be fully anticipated. As UBS Bank economists Maury Harris and Drew Matus have explained:

 

The main impact on markets would come from sharply reduced liquidity in the U.S. Treasury market, as financial firms’ procedures and systems would be tested by the world’s largest debt market being in default. Given the existing legal contracts, trading agreements, and trading systems with which firms operate, could U.S. Treasuries be held or purchased or used as collateral? The aftermath of the failure of Lehman Brothers should be a reminder that the financial system’s “plumbing” matters. All the legal commitments and limitations in a complex financial system mean a shock from an event that is viewed as inconceivable – such as a U.S. Treasury default – can cause the system to stall. The impact of a U.S. Treasury default could make us nostalgic for the market conditions that existed immediately after the failure of Lehman Brothers.

 

Voicing a similar opinion, Wells Fargo Bank economist Scott Anderson has said of a default, “It would be an earth-shattering event. It’s taken as given that U.S. Treasuries are a safe asset. Once you question that assumption, it shakes the foundations of global finance and the way it’s been established over the last 50 years.”

 

University of California, Berkeley, economist Barry Eichengreen, a world-renowned expert on the international monetary system, warned that a debt default could lead to a run on the dollar if foreigners come to feel that the U.S. is being run by irresponsible leaders. As he put it:

 

If there is a threat to the dollar, it stems not from monetary policy, but from the fiscal side. What is most likely to precipitate a dollar crash is evidence that U.S. budgets are not being made by responsible adults. A U.S. Congress engaged in political grandstanding might fail to raise the debt ceiling, triggering a technical default. Evidence that the inmates were running the asylum would almost certainly precipitate the wholesale liquidation of U.S. Treasury bonds by foreign investors.

 

On July 22, 2011, Macroeconomic Advisers, a well-known economic forecasting company, warned its clients that a one-month delay in raising the debt limit would reduce real gross domestic product growth by 0.6 percentage points in the second half of the year and the unemployment rate would rise by 0.4 percentage points. Interest rates would rise 20 basis points and the stock market would fall 5 percent. The result would be a “growth recession.”

Congress finally acted in the nick of time and the debt limit was raised on August 2, 2011. Three days later, Standard and Poor’s lowered its rating on U.S. Treasury securities from AAA to AA+. It cited continuing political difficulties in raising the debt limit in a timely manner as a key factor in the downgrade. As it explained:

More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon.

In a July 2012 report, the GAO concluded that the extraordinary actions that the Treasury Department had to take to avoid default forced it to raise money in a less efficient manner that raised the cost of borrowing by $1.3 billion in 2011.

Approaching the current debt limit expiration, Wall Street firms seem somewhat blasé. They appear to feel that the relatively painless increase in the debt limit on February 4, 2013 bodes well for future increases. In an April 18, 2013 report, Goldman Sachs said, “we expect the next debt limit debate to be less disruptive than the 2011 debate.”

On September 18, 2013, economist Mark Zandi of Moody’s Analytics told the Joint Economic Committee he expects the debt limit to be raised in a timely manner. Failure to do so, however, would be debilitating to the economy:

Any delay in raising the debt ceiling would have dire economic consequences. Consumer, business and investor confidence would be hit hard, putting stock, bond and other financial markets into turmoil.

This was clearly evident in the near-debacle that occurred in summer 2011, when lawmakers raised the debt ceiling at the very last minute. Brinkmanship nevertheless undermined consumer confidence, sent stock prices reeling, and caused credit default swap spreads on U.S. Treasury debt to widen sharply.

Economists generally agree that policy uncertainty is bad for the economy. According to one analysis, the uncertainty caused by the debt limit debate in 2011 was significantly greater than the terrorist attack on September 11, 2001 or the collapse of Lehman Brothers in September 2008.

The historian Joe Thorndike is inclined to think that debt limit debates have, historically, been helpful in focusing the Congress’s attention on long-term fiscal trends. That is an argument that may have been salient before enactment of the Budget Act of 1974, which requires Congress to examine aggregate budget trends on a yearly basis. Therefore, I believe the debt limit is simply redundant in that sense.

The core problem is that relations between the two major parties in Washington are deeply poisonous today for reasons only peripherally related to the budget. That makes the debt limit too easy a hostage for the party not holding the White House to use for extortion of demands that lack a democratic mandate in the form of majorities in the House and Senate plus control of the White House.

If the consequences of such brinksmanship fell only on elected officials, it wouldn’t matter. But given the potentially large economic costs of a debt default, the U.S. economy and average Americans could suffer a considerable amount of collateral damage.

 

 

We are going to breach the Oct 17 debt ceiling

A week ago I was convinced that there was a zero chance of this happening, but over the past few days I've become convinced that there is a 90% chance of it happening.

The GOP is currently engaged in a full court press to make the point that breaching the debt ceiling is not the same thing as default. Putting aside the "payment prioritization" nonsense, which has no legal basis and which could not possibly be implemented in the Treasury's systems, there are some valid reasons why October 17 may not be the date.

Keep in mind these dates:

October 22 - The date the CBO predicts the government will actually start missing payments.

October 24 - Treasury must roll over $24 billion in T-Bills. Technically the interest should be considered an expenditure (unlike the principal) but due to the zero coupon nature of these instruments I'm unclear on the actual govt accounting.

October 31 - Treasury must roll over $115 billion in Treasury Notes and Bonds and make an accompanying $6 billion interest payment.

November 1 - $55 billion in Medicare, Social Security, and military payments are due.

My prediction: The GOP is going to refuse to raise the debt ceiling on October 17 based on the calculation that they have at least until October 22 and possibly until October 31 before an actual default takes place. The morning of October 18 they'll issue a statement to the effect of "see, we breached the debt ceiling and nothing happened", followed shortly by a litany of demands that must be met before they agree to a debt ceiling increase, along with a sudden willingness to negotiate over those demands over the following few days.

The wildcard in this scenario, and the one that scares the crap out of me, is how the markets and the overall financial system will react in the days leading up to October 17 not to mention the days after it. This is why I'm still leaving open a 10% chance that a deal is reached at the last minute prior to the passing of October 17. A market panic could force them to abandon this plan at the eleventh hour.


Excellent summary - should be

Excellent summary - should be widely distributed. The public is hearing too much nonsense;

Rand Paul on CNN. “If you don’t raise the debt ceiling that means you won’t have a balanced budget, it doesn’t mean you wouldn’t pay your bills.”

Tom Coburn: "I would dispel the rumor that is going around that you hear on every newscast that if we don't raise the debt ceiling, we will default on our debt, we won't."


Bartlett just wrote the best

Bartlett just wrote the best Brandeis Brief I've seen in a long time.


Already?

Isn't the fact that the current discussion about the realistic possibility of Congress allowing a default raises questions about the full faith and credit of the US government?

In other words, at this point - why is an actual default necessary before we wonder if national leaders will honor all our debts? Clearly they are considering not to.


No, there's no uncertainty

No, there's no uncertainty here. Get a Brain! Morans


Spelling

I believe you may have meant "morons" ...


Morans was correct and....

That was facetiuousness from one of gazillions of mispellings on tea party signs...


The debt ceiling is a

The debt ceiling is a made-in-DC circus, a conspiracy among the media and the 2 major parties.
Barry voted against raising the debt ceiling when he was a 3-year-senator-who-sent-caucus-organizers-to-Iowa-the-day-after-he-won-his-Senate-race.
Now he's in the White House and wants the GOP to raise the debt ceiling so he can put on another $6 trillion in national debt.
Bartlett quotes a bunch of left-wing academics and Wall Street types.
Big deal.
These are the same folks who ferociously opposed the sequester.
Remember the sequester?
It was to have been the end of the world.
Look out the window.
It's still there.
The GOP have played along with the Demagogues for years, condoning and/or contributing to deficit
spending for decades.
If the GOP continues doing so, they must be destroyed and replaced with a fiscally responsible party.
Mr. Bartlett speaks:
"That is an argument that may have been salient before enactment of the Budget Act of 1974, which requires Congress to examine aggregate budget trends on a yearly basis. Therefore, I believe the debt limit is simply redundant in that sense."
Ha! $16 trillion in debt.
Oh, excuse me, Professor NoBell says "the debt doesn't matter."
Right.
And when interest rates return to normal levels, the interest payments won't matter.


Well

You lack a fundamental understanding of what, if anything, you just read.


You've failed to grasp what

You've failed to grasp what Bartlett means by calling the debt ceiling redundant. This was just one of our clues that you're not that bright.

Among others, the notion that "Wall Street types" is somehow a discrediting epithet in this context; the notion that sequestration, which has had an adverse economic effect while lowering the deficit (which probably escaped your notice), can be adduced for making predictions about something entirely different; the notion that presidents are who control the level of structural debt; the notion that a meaningless vote not to raise the debt ceiling is the moral equivalent of a meaningful vote not to raise it; and by no means least, the completely idiotic notion that it's "fiscally responsible" to threaten default to get one's way (and relatedly, the notion that default wouldn't be so bad).

Time to grow a brain.


And a RW rant by an "annonymous commenter" means what, exactly?

Seriously.

This is what we're dealing with.

Mr. Bartlett writes an exhaustively researched and sourced explanation and some "moran" (I don't want to insult actual morons, who aren't that stupid) figures his rant filled with Fox News/Limbaugh talking points is supposed to persuade anyone.

Actually, if anything, it's evidence that the Tea Party is, indeed, enormously ignorant to the point that it's a reliable rule of thumb to do the opposite of whatever they say.


Good Article

I wanted to say that I am not sure if anyone that disagrees bothered to find out who Bruce Bartlett is, but so they know, he is a specialist on supply-side economics and was an adviser to Reagan, as well as a treasury official under H.W. Bush.

This guy isn't a left wing nut job, he's a conservative.


Meanwhile, the House proposes a Stupor Committee

They do not actually call it that, but, I think this name follows from understanding what this Committee can and cannot do:

http://docs.house.gov/billsthisweek/20131007/BILLS-113hr-PIH-bicamwrkggr...

A quick read suggests this is just like the Super Committee, except:

  1. There is no statutory time limit for the committee (not that it matters)
  2. The committee's recommendations have no binding authority.
  3. Any recommendation requires a majority of the majority party members from both the House and Senate.

It is not clear to me that you could come up with an idea less likely to accomplish anything quickly even if that were your goal. So I am beginning to think that the House is feeling no real sense of time urgency here, and unless there is a rapid reversal of opinion from the Speaker (and there could be, for sure), we could end up crashing through the October 18 deadline.


...but that was so yesterday?

And the latest is some oddly qualified 6-week debt ceiling raise is the next try. So the market celebrated today, but it is not clear to me that this will work, either. And the shutdown is explicitly being left out of the mix.


Mechanics

Would you explain the mechanics of how the Treasury works. It has the authority to print money. What's to stop it from printing money it needs to pay its bills?

Alternatively, what's to stop the FED from giving the Treasury "overdraft protection," which would work as if it were debt but which is not formally agreed to as debt?

I agree that the whole thing is a serious (stupid, and unnecessary) issue, but I'd like to know more about the mechanical details of how it works.

Thanks.


Wikipedia is your friend :-)

Seriously, their coverage of these topics is pretty good and better referenced than anything you will see in blog post comments even in such an exclusive and high class blog as this one.

But briefly, Treasury can mint coins, and the Fed prints bank notes. And in the situation discussed here, neither is directly relevant since what the Treasury's problem is a lack of borrowing authority to cover the checks it is going to be writing in late October, since it is essentially out of cash and income will be exceeded by expenditures. And it must by law write those checks.


The Bureau of Engraving and

The Bureau of Engraving and Printing prints money, and it is a Treasury department, but that's a really small detail; only a very small sliver of all the US Dollars in existence exist as paper. So set aside the phrase "print money" for a moment.

The Treasury cannot create new US Dollars, in the sense that a guy in the US Treasury can type "$500" into a computer and then pay an invoice with it. Every dollar that leaves the Treasury must be matched to some dollar coming in, just like any other organization.

There IS an organization in the US Government that can create US Dollars, but it's the Federal Reserve, not the Treasury. Someone at the Fed can in fact enter a number into a computer, and cause more dollars to leave the bank than have come in; they do this through a bunch of different mechanisms, normally by paying a certain amount of interest on loans, but lately they've been doing Qualitative Easing, which is plainly buying financial assets off the open market (like bonds) and giving the seller dollars which have been created from nothing.

The Fed can't do this arbitrarily, it has a process directed by the Fed Board of Governors, which is composed of (mostly) bankers. They are, by law, forbidden to take into account the financial condition of the Treasury when they decide how much money to print; they are only supposed to care about the stability of the dollar's value, and the level of national unemployment. The people who participate in the Fed decisions are supposed to be key stakeholders in the health of the economy, and take action accordingly to protect themselves. That's the concept, anyway.

SO, the short answer is that the Treasury cannot pay its debts with created money; people have to give the Treasury money through taxes. The Fed COULD give the Treasury money by buying some THING of some kind from it, like some sort of instrument that could appear on the Fed's balance sheet but not the Treasury's, but this would have the effect of making the Fed a fiscal authority and not merely a monetary one, the legality would be questionable and it would pierce the very boundary between fiscal stability and monetary stability that the Federal Reserve Act created.

I think, I'm no expert.


Repo the SS Trust Fund to the Fed?

The special trust fund securities are not marketable, but are they hypothecable? It's a crazy thought but these are crazy times. Could they be repoed to the Fed for funds needed to make social security payments while the debt-ceiling standoff continues?


don't you mean rehypothecable?

So I am not quite sure what you really mean to do here. The securities in the SS Trust fund are US treasury bonds purchased by the trust fund. How would the Treasury get their hands on them in the first place? They don't have the money to purchase them (even if that were allowed; this is what the debt ceiling means), and for them to be loaned (if that were allowed) would presumably require the permission of the Trustees. Conveniently, that board does include Secretary Lew and Secretary Sebelius, but there are four other members, two of whom are acting (due to vacancies at Labor and the SSA Commissioner) and two who must be appointed and Senate confirmed. (And those trustees slots were vacant for three years before being filled the last time.)

So if I am right about this, even if it were legal, it would almost certainly be politically impossible, since if somebody tried pulling that stunt, I am sure the Senate would fillibuster replacements for Labor, SSA, and the two appointed trustees (we need two more for FY2015, which is not that far away) and the stunt would become an issue in the mid-terms.

Oh yeah: the Fed would have to go along, too. I really don't see that happening, since there is just too huge an incentive in doing this the "right" way. And you know there would be a lawsuit instantaneously. I think this is even less probable than minting platinum coins.


Listen homies. Breaching the

Listen homies. Breaching the debt ceiling is not the end of the world. I know it, because I am from Argentina and I was there when they defaulted and Argentina is still there. Well, sort of...Question is, do you want to get closer to the std of living in Argentina....


What to do -

What to do when you are in debt? Google it an get common sense.
- stop borrowing
- negotiate your debt
- make a budget
- pay your bills.

what are not doing these activities.
in fact we are on steroids going the opposite way on all four of these.

i have no debt, and i work hard, i save for the rainy day that is coming because you don't do these 4 things.


Please, spare us.

Yes. Government budgeting is _exactly_ like your own household spending and bank account. Absolutely _no_ _one_ over the last thirty-five years ever thought of this simple-minded and wrong-headed analogy. You are the first.

Please, spare us.


It is that simple... Just

It is that simple... Just because something is simple doesn't mean its wrong or stupid.

Running any economy is all about economizing. (managing your resources) That's it. Just spend what you can and leave it at that. Don't spend over the limit. If Democrats want more government programs, fine but they should argue and fight for these programs within our budget limits. The same goes for Republicans.


I say, cash out, short out

I say, cash out, short out and hope for a crash. Remember, money doesn't go away, it just trades hands. The reality is, we have been living in a trade deficit, debt fueled fantasy economy for over 30 years now. Too bad Reagan didn't put his money where his mouth was, or all the rest that followed as for that matter. Their only saving grace was the fact that interest rates went to 14% in the early 80's to combat inflation, so the FED always had the luxury of dropping rates to restart a slow economy. But no more, and QE has so many adverse affects, it makes you wonder if it's worth it. We need a big correction in trade policy, wages (including govt. jobs) and prices, then millions of jobs will come back to the USA and we can all start over again, hopefully right next time. Or else, we get to do this every year, and it's going to get worse. Just wait till rates go up.


Treasury can't prioritize ?

so Bartlett and Secretary Lew claim that the Treasury can't prioritize.

That's interesting, because the Bureau of the Public Debt in their "Strategic Plan" claim that they have a business continuity captability that can cover: terrorism, epidemics, natural disasters and cyber attacks (page 14)

http://webcache.googleusercontent.com/search?q=cache:H82svIdZrNQJ:www.pu...

http://www.publicdebt.treas.gov/whatwedo/bpdstrategicplan09-14.pdf

so the full faith and credit is good in case of nuclear war or a smallpox outbreak, but prioritization is not possible ?


A few points to keep in mind

1) The Treasury actually hit the debt ceiling back on May 19, and has ALREADY been using extraordinary measurures to keep payments flowing.

2) The Treasury has no legal authority to prioritize payments, and the law requires them to execute all appropriations. In recognition of this fact, the House recently introduced a bill authorizing the WH to prioritize payments but the bill did not pass.

3) The Treasury processes 80 million invoices per month across at least 3 different systems and the systems are set up to automatically pay on the due date, to prioritize you'd have to manually override each one.

Now let's be clear - October 17 probably is NOT the drop dead date. It's likely (though not certain) that the actual date when they run out of cash is October 22. The next interest payment is on October 24, on an issue of maturing T-Bills, but it is a small one of around $60 million or so. On October 31, there is an interest payment of around $6 billion due. On November 1 there is a huge payment of around $58 billion in Social Security, Medicare, and military salaries due. The next interest payment after that is November 15.

If the debt ceiling is not raised, it's unlikely we make it past October 24. If by some miracle we do, then how do you, as a "prioritizer" handle the next week? Let's be clear, you're arguing in favor of not paying seniors on Social Security and not paying soldiers fighting in Afghanistan, so that interest payments can be made and almost half of those interest payments go to foreigners including foreign governments. Is it politically feasible to prioritize Chinese businessmen over US combat soldiers? And of course, let's not forget that the interest payment is actually due the day BEFORE the big SS/Medicare/Military payment, so it looks like you'll need to reverse the laws of physics as well. Finally, what do you think the financial markets will be doing while all this is happening?

The people making the "Treasury can prioritize payments" argument have not thought their position through at all. Even if it were possible, which it isn't, it would likely only buy them 1 week and certainly could not buy them more than 2 weeks.


Debt prioritization: "if only I could reach him" **

there is a difference between "can't" and "don't want to"

i go back to the Bureau of Public Debt Strategic Plan. they say they have a recovery plan to keep issuing and paying debt no matter what - i suggest they execute it.

on the three payment systems: they are supposedly a BPD system that feeds fedwire, a DOD system, and a third system that pays the rest.

http://www.businessinsider.com/can-the-treasury-prioritize-payments-if-t...

i suggest step 1 to avoid a debt default is to keep the BPD/fedwire system turned on. to help out on that, in the house CR the republicans allowed that debt interest be exempt from the debt ceiling (section 138)

http://www.gpo.gov/fdsys/pkg/BILLS-113hjres59eh/pdf/BILLS-113hjres59eh.pdf

i was surprised that democrats took 138 out of the senate bill when they are supposedly so concerned about a debt default.

it's just nonsense that debt interest can't be prioritized when: it is less than 10% of total revenue; there is a completely separate payment system; BPD has a business continuity plan; the republicans have offered to exempt interest from the debt ceiling

as for what is paid and what is not: that's going to be negotiated with the republicans; if democrats want to get away from the immediate balanced budget requirement they are going to have to make some concessions

** the quote refers to a statement made by the character of the Sheriff of Nottingham who was cowering under the banquet table while Errol Flynn was tearing up the castle in the Adventures of Robin Hood


No

It's uncertain whether there will be sufficient revenues coming in on October 31 to meet just the interest payments due that day, and it's very much certain that there will NOT be sufficient inflows on November 15 to meet the interest payments due that day. So your "plan" would require NOT making payments to mandatory budget items even on days when there was sufficient cash on hand to make them, in order to save up for interest payments in the days ahead. Also, while interest payments may be a relatively small % of the budget, when combined with Social Security, Medicare, and National Defense, it amounts to around 75% of the total budget. There simply are not that many other things to "not pay" in order to save up for an upcoming interest payment.

Payment prioritization is a complete non-solution that, as I said above, at most buys an extra couple of weeks.


Skipping Ruth's Chris is not the same as mortgage default

quote from RueTheDay

"So your "plan" would require NOT making payments to mandatory budget items even on days when there was sufficient cash on hand to make them, in order to save up for interest payments in the days ahead."

you got it ! you skip the outing to Ruth's Chris so you can pay the mortgage.

in addition, I go back again to the House CR and Section 138, which exempted debt interest and principal from the debt ceiling.

http://www.publicdebt.treas.gov/whatwedo/bpdstrategicplan09-14.pdf

the democrats have obviously blocked this, as accepting it would destroy their claims about the "impossibility" of prioritizing debt payments.


The validity of the public

The validity of the public debt of the US shall not be questioned? This is ridiculous, we are human being we must question if there is any wrong.




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