I have been trying to understand some of the arcane issues surrounding the way the US government is run and what follows is what I have been able to learn. Take it with a grain of salt since I am neither an economist nor an accountant.
The current debt limit, the maximum amount that the government is allowed to borrow, was raised on May 19, 2013 to $16.70 trillion, which is projected to be reached on October 17, 2013. When the government’s expenditures exceed the amount it has in its checking account, the government is authorized to sell US Treasury notes to raise cash make up the difference provided the total amount does not exceed that limit.
As of October 4, 2013 the government had $29 billion in its checking account, down from $88 billion at the beginning of October. It is this account into which daily revenue goes in and from which daily expenditure goes out. This number goes up and down depending on the day but the general trend is down, unless more money is put into it by selling Treasury notes. For example, on September 30, the balance in the account increased from $17 billion to $88 billion due to such sales.
The much-talked about October 17 deadline is an estimated one that (I think) is based on when the government expects to sells the last of the allocated amount of Treasury notes. Then what is in the account is all that is left.
It is possible that because of some decreased expenditure due to the shut down, the rate of decline in the balance gets lowered a bit. But on November 1, $60 billion in payments have to go out to “Social Security recipients, Medicare providers, civil-service retirees and active-duty military service members.” That is simply not going to happen unless the debt limit is reached and is an ultimate deadline.
What happens when the balance becomes zero?
At that point, if nothing else is done, the government has to monitor what comes in daily and then pay out only that amount. This means that, in theory at least, it need not stop making all payments altogether but can pick and choose what it pays out. Some Republicans say, in pooh-poohing the consequences of not raising the debt ceiling, that it can prioritize payments in this way. The people most likely to be paid are those who own US Treasury notes (many of whom are not Americans, making it politically unsavory) because the purchase of those is what funds the government. Next up will likely be Social Security and Medicare payments and the military because those have powerful constituencies. You can be sure that payments that serve the needs of the poor will go right to the bottom of the queue.
But this whole notion of partial payments to select persons is ridiculed as unworkable by those in the know. As Mark Patterson, the chief of staff at the U.S. Treasury from 2009 to last May, says:
“I think if you ask anybody who has been secretary of the Treasury of either party going back many years, they would tell you that is a god-awful idea,” Patterson says.
“If we go into an internal debt crisis, if you will, where we’re not paying Social Security beneficiaries who’ve paid into the system over the years, many of whom live check to check, then we are going to appear as a country that is in a whole lot of trouble and the world is going to view us that way,” Patterson says.
He says that Treasury departments in both Democratic and Republican administrations have concluded that paying all of the nation’s bills “on time, in full” is what makes investors, whether they’re individuals or other countries, willing to lend money to the U.S.
Even if a president and Treasury secretary decided to prioritize payments, it would be a huge technical challenge, says Patterson, because the Treasury’s system that makes 80 million payments a month is automated.
“It is designed only to make all payments on time and in full,” he says. “There’s no switch that says, ‘Pay payment A, C, D and G today and tomorrow pay some other set of priorities that’s not all payments.’ “
The Treasury makes 3 to 5 million automated transactions a day and prioritizing them would require re-programming the entire system, a difficult task at the best of times but that seems impossible right now with 80% of Treasury workers furloughed. Felix Salmon is not sure that it can’t be done but he doesn’t seem to have considered the actual logistical problems of carrying out such a plan.
There is simply no easy way out.