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Oct 08 2013

Can the government still run without raising the debt ceiling?

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.

17 comments

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  1. 1
    CaitieCat, in no way a robot nosireebot

    I’m so, so glad I live in a country with a Westminster system of government. Government refuses to govern? GG/Queen says “Okay, thanks for that you useless pillock, Parliament dismissed, can anyone form a new government? Yes? Good, then govern. No? Okay, election time!”

  2. 2
    unbound

    Yeah, Felix Salmon is just making suppositions and clearly doesn’t understand large systems. Unless the system explicitly has the capability to make prioritized payments in the manner he suggests (and it has been tested for such conditions), there is actually no way to make the system do it in less than several months worth of pre-planned work (with the planning involved in the change, it would add up to at least 6 months for a system processing millions of transactions a day). Trying to make that kind of change to such a large system in a shorter time will almost certainly result in crashing the system…only a moron would even consider doing that (so maybe someone in congress will authorize it).

    I’m always amazed at people like Felix who seem to think that because teenagers can program a nifty little website that large processing systems can’t be much more complicated. It’s like thinking that just because a middle school kid knows basic algebra, he can easily handle differential equations.

  3. 3
    raven

    Picking and choosing which payments to make can be done with a computerized system.

    It can’t be done soon though. It would take months at least to reprogram the system and with the government shut down, a lot of those people are gone.

    We are seeing that with the ACA websites. A lot of those have crashed and aren’t working right. Some states are hoping to get theirs debugged by the end of October. They were supposed to go operational Oct. 1.

  4. 4
    unbound

    @raven – And that is just for break fixing (reference to ACA issues), which is usually easier and less error-prone to making the problems worse. Changing a large system to behave differently is typically much more difficult, and almost always ends up with major problems if it is rushed.

  5. 5
    sigurd jorsalfar

    The easy way out is the Platinum Coin. Obama can instruct treasury to mint a platinum coin in any denomination, which is then deposited into the governments account at the Fed and all payments can continue to be made without prioritizing.

  6. 6
    raven

    I’ve been reading whatever I can find. Everyone knows what is going on because it is obvious. No one knows how it will end. We are all on terra incognita.

    Here’s one guess from Morgan Stanley. FWIW, Obama, the lawyer and constitutional scholar has already rejected the 14th amendment solution. Although he can always change his mind.

    businessinsider Joe Weisenthal:

    If the Treasury is unwilling to stretch the definition of extraordinary measures, on the day that the Federal Reserve predicts that the Treasury will run out of cash in its account and the Treasury is bound by the debt ceiling, it suspends all payments and awaits instructions from the Treasury. As a result, the government’s principal economic officials will face the prospect of violating one of these three laws:

    1. The Second Liberty Bond Act of 1917 that establishes the debt ceiling;

    2. The Federal Reserve Act that prohibits the Fed from lending directly to the Treasury; or,

    3. The 14th Amendment of the Constitution that holds that the debt of the United States government, lawfully issued, will not be questioned.

    They have to break a law. At the end of the day, officials will avoid violating the Constitution by indicating that they have been given inconsistent instructions and are obeying the one with the most important precedent.

  7. 7
    raven

    I’m so, so glad I live in a country with a Westminster system of government.

    QFT.

    If a small minority can shut down the entire government for hostage taking, our constitution is flawed.

    There is a way to form a new government. We have to wait for new elections at the end of 2014. Or circulate recall petitions and get enough Tea Partiers out of office. Neither of which will happen soon enough.

    The oogedy boogedy xians claim out constitution was written by god and jesus. It’s just as well that it wasn’t. It would mean that they did what they did in Genesis. Created a flawed world, flawed creatures like us, and a flawed governing document. So much for being all powerful and omniscient.

  8. 8
    Gregory in Seattle

    A big chunk of the daily expenditure goes to pay interest on the national debt. Some economists believe that our debt has passed a kind of Schwarzschild radius and has become a self-sustaining, ever-growing black hole: keeping up with payments on the debt require more money than is coming in, which requires borrowing more money, which increases the size of debt payments. And it was Republicans that got us into this mess, by pushing us into several wars and then funneling billions of dollars into the pockets of private contractors rather than spending the money to resolve the wars.

    Default — in effect, the US government declaring bankruptcy and reorganizing — is likely the only way to get out from under this. That would have global consequences, though: most US debt is owned by foreign countries, who use the stability of the US dollar to stabilize their own currencies. If the USD destabilizes and the US economy crashes, dozens of other economies will crash, too: 60% of China’s foreign reserves is in USD, while Japan’s foreign reserve is 40% USD. If those economies crash, the yuan and yen will crash, too, and the ripple effect will be… unpleasant. Tea Party isn’t just threatening to destroy the United States with its ignorant obstinacy, it is threatening a long-term global depression the likes of which we’ve never seen.

    I posted a Bonds 101 at Zingularity a few days ago that might be of interest.

  9. 9
    raven

    A big chunk of the daily expenditure goes to pay interest on the national debt.

    It’s not quite that bad. It’s 6% of the budget.

    USNews. com:

    In 2012, the U.S. will spend around $220 billion in net interest on its debt, according to the Congressional Budget Office — a figure that is expected to spiral ever higher in coming years.

    and

    But viewed another way, it can seem much smaller, at around 6 percent of the total federal budget and 1.4 percent of GDP.

    The interest on the national debt is 6% of the total federal budget.

    The national debt is a problem but it isn’t an immediate problem. And the trends are favorable. Our deficit this year is half of what it was a few years go and going down, thanks to Obama’s tax increases and economic recovery.

    This current crisis is entirely human caused. It’s a political crisis from the Tea Party, not an economic crisis. If they throw the US back into recession, the national debt problem will get much worse in a hurry, not better.

  10. 10
    Gregory in Seattle

    @raven – Payment on debt is supposed to be paramount, made before any other expenditure. If you have $300 million in bond payments due today, and only $300 million in reserves, 100% of your reserves goes to those bond payments, or else. Also, it is not just the interest that must be paid out: when a bond matures, the principal investment must be handed over to the bond holder. Defaulting on that is far more dangerous than defaulting on an interest payment.

  11. 11
    Scr... Archivist

    Gregory in Seattle @8,

    Tea Party isn’t just threatening to destroy the United States with its ignorant obstinacy, it is threatening a long-term global depression the likes of which we’ve never seen.

    And such desperate conditions are a prosperous environment for demagogues, right-wing populists, and fascists. Severe economic pain might even reverse the recent expansion of more liberal social views, and revitalize racial discrimination. A new depression would re-fill the swamp we’ve been trying to drain for decades.

    Meanwhile, if it’s harder for the U.S. to borrow after a ratings downgrade, that would also be a victory. The far right could use it as further leverage to cut safety nets. And, if it screws over other countries such as China and the oil-producing states, they probably don’t consider that a bad thing either.

    These Tea Party types remind me of the Reaganites who thought you really could win a nuclear war.

  12. 12
    raven

    Tea Party isn’t just threatening to destroy the United States with its ignorant obstinacy, it is threatening a long-term global depression the likes of which we’ve never seen.

    If the USA goes down, I go down, all the other US citizens go down, the economy goes down, followed eventually by…the rest of the world.

    .Big creditors China, Japan press U.S. to resolve debt row
    By Ben Blanchard and Tetsushi Kajimoto | Reuters – 4 hours ago..

    BEIJING/TOKYO (Reuters) – Japan’s finance minister pressed the United States on Tuesday to quickly resolve its political deadlock over government finances to avoid a fiscal crisis that could damage the global economy.

    The comment from Taro Aso is the latest sign that Japan and China – the biggest foreign creditors to the United States – are increasingly worried that the U.S. government shutdown and the standoff over the debt ceiling could wreak havoc on their trillions of dollars of investments in U.S. Treasury bonds.

    deleted

    TRILLIONS AT STAKE

    As of July 31, China held $1.28 trillion in U.S. Treasury bonds and Japan held $1.14 trillion, Treasury Department data shows.

    China and Japan have 2.4 trillion USD of US Treasury bonds. They aren’t happy.

    Thanks to the Tea Party, we are threatening our largest trading partners and allies with huge economic problems not of their own making for no good reason. I wouldn’t call this good and competent government.

    Who in the hell voted for these morons? (It’s a rhetorical question, most of the Tea Party support is in the south USA) Odd factoid from todays headlines. 9 out of 10 of the poorest cities in the USA are in the South as are the highest rates of uninsured for health care people. They never seem to get tired of being poor and dumb.

    Nine of the 10 lowest median incomes are found in the South, as it is defined by the Census Bureau.

  13. 13
    Gregory in Seattle

    @Scr… Archivist – Sadly, you are probably right. But when prices skyrocket because China can no longer afford to manufacture cheap clothes and gadgets, when powerhouses like Toyota, Honda, Samsung, Sony, Sharp, Acer, Asus, Ricoh, and Suzuki must shrink operations or go out of business entirely, when food supplies become seasonal because we can no longer afford to import fruits and vegetables from the southern hemisphere, when fuel becomes $8 a gallon and shipping goods to another city becomes outrageously expensive…. Who do you think the TP will blame? Not themselves, surely.

    We have become a global economy: it is impossible to de-link major players like China, the US, the Eurozone, Brazil, Japan and OPEC. We are living a real, live domino theory here. We are safe for now, but the Tea Party is shaking the table.

  14. 14
    raven

    Ironically, until the Tea Party started trying to club the USA into submission, things were going pretty well considering.

    Under Obama’s reign, unemployment is going down, housing recovering, the deficit is half what it was a few years ago, the economy is growing albeit slowly, and the Dow set an all time high. We are out of Iraq, Afghanistan is winding down, bin Laden is dead, and al Qaeda is on the run.

    They are simply exchanging progress for another recession at best and the end of the USA as a superpower at worst. For no good reason. People say this isn’t treason, but it is close enough IMO.

  15. 15
    Andrew G.

    Gregory @10: matured bonds can always be rolled over without raising the debt limit.

  16. 16
    Gregory in Seattle

    @Andrew G. #15 – Bond holders may, at their sole discretion, chose to accept a new bond rather than cash. This is not something that the bond issuer may do on its own. So China, Japan and other holders of Treasury securities could, if they wanted to, chose to roll over matured bonds into new issues. It would be within their rights to demand reimbursement for the face value of the bonds, though, and the US would have no choice but to make good on that obligation.

    Granted, China and the other major investors would almost certainly roll things over to prevent their own catastrophes. Minor foreign investors, with less US investment, might not be so generous: Colombia, Malaysia or Indonesia would cause a world of hurt — literally — if they insisted that the US meet its bond obligations on maturity.

  17. 17
    Andrew G.

    Gregory @16: if the bond holder wants cash, the government just pays cash, and since the outstanding debt is now lower by the amount of the bond, issues another bond to replace the cash. Net effect: none, except that the cost of servicing the new bond is dependent on the current interest rate rather than the rate in effect when the old one was issued.

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