Debt Ceiling Drop Dead Date Closer Than Previously Thought

Debt Ceiling

Recent Treasury Department projections indicate that the nation will run out of borrowing authority and/or cash on hand in as little as eight weeks:

The debt ceiling is a time bomb with a faulty timer: All of Washington sees it ticking toward default, but nobody knows exactly when it will explode.

In a letter to House Speaker John Boehner, Treasury Secretary Jacob Lew projected that the department’s “extraordinary measures” currently being taken to avoid default will be “exhausted in the middle of October.” From there, Lew writes, the United States would have only whatever cash Treasury has on hand, estimated to be about $50 billion. Lew calls that potential situation “unacceptable.”

But Lew, like everyone else, is just working off his department’s best guess.

Treasury doesn’t get to pick a date for default. Rather, the department is subject to the ebb and flow of government revenues and expenditures. And those figures are anything but predictable, because how much the government owes its creditors on a given day—and how much cash it has to pay them—is based on a host of volatile economic, legal, and political factors.

“It’s very difficult to tell, particularly this far out,” when exactly Treasury would have to default on its debts, said Steve Bell of the Bipartisan Policy Center. “October is an extremely lumpy month. Some days, there’s cash coming in; other days, there’s cash going out.”

And that unpredictability makes an accidental default all the more likely, Bell said, even if neither side wants it to happen.

“That’s the danger. It’s not that somebody plans to do this,” he said. “It’s that this is the time when it’s very, very easy for mistakes to get made.”

Kevin Drum suggests that this puts Republicans in a bind:

Politically, this means that Republicans don’t really have the option of quickly passing a 2014 budget (or a short-term continuing resolution) and then taking some time off to plan for their latest round of debt ceiling hostage-taking at the end of the year. If mid-October really is the drop-dead date, it means that budget negotiations in late September and debt ceiling negotiations in early October pretty much run right into each other. It’s Fiscal Cliff v2.0.

I don’t quite know what this does to John Boehner’s fragile attempts to keep the lunatic wing of his party under control. Nothing good, probably. I’m also not sure what it does to President Obama’s promise not to negotiate over the debt ceiling. If all of this stuff get munged together, then everyone’s going to get mighty hazy mighty fast about what exactly is being negotiated.

Well, I guess that gives us something to look forward to after Labor Day, huh?

FILED UNDER: Congress, Deficit and Debt, Economics and Business, Quick Takes, US Politics
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010. Before joining OTB, he wrote at Below The BeltwayThe Liberty Papers, and United Liberty Follow Doug on Twitter | Facebook

Comments

  1. al-Ameda says:

    Politically, this means that Republicans don’t really have the option of quickly passing a 2014 budget (or a short-term continuing resolution) and then taking some time off to plan for their latest round of debt ceiling hostage-taking at the end of the year. If mid-October really is the drop-dead date, it means that budget negotiations in late September and debt ceiling negotiations in early October pretty much run right into each other. It’s Fiscal Cliff v2.0.

    Who can be optimistic, no matter what the details of the timing are here?

    The Republican Party was quite willing to take a leap from the Fiscal Cliff 2 years ago when they very clearly had no problem with forcing a downgrade in the rating of American debt securities. If John Boehner can be considered “Republican Leadership,” and I suppose he is in the nominal sense, he clearly has no power to control the zero-sum nihilists who run that ship.

  2. Ron Beasley says:

    The only way we get through this is for Boehner to dump the Hastert rule. Does he have the guts to do what’s best for the country (and his party)?

  3. C. Clavin says:

    “…I don’t quite know what this does to John Boehner’s fragile attempts to keep the lunatic wing of his party under control…”

    Actually, in todays Republican caucus lunacy is a feature…not a bug.
    If there is a “wing” to the Republican House it is the moderates that inhabit it.
    The question is if Boehner can work around the majority of his caucus…as he has done the few time that he has ignored the Hastert rule.
    There is no controlling the Tea Baggers.
    http://cache.daylife.com/imageserve/03Cv1OZbWpgPg/610x.jpg

  4. Gustopher says:

    I’m pleased the budget and the debt limit are coming up at the same time — Obama should veto any budget or appropriations that does not come with the debt authority to implement that budget. No reason to give the Republicans two bites at the apple.

  5. Tyrell says:

    What is the interest rate that the government has to pay on this
    debt ? What if they miss a payment or are late, does the rate go up like everyone else ? Are there late fees and penalties?
    I have a debt limit – the bank and credit card companies set it. I have not heard any arguments why the government should not have to abide by the same rules as the average, working class people. I also have a budget based on what I make. If I get a raise (has not happened in about 6 years) then I can adjust my budget. Maybe the President should give a talk explaining to people how the monetary supply works, prime interest, deficit spending, reserves, the value of the dollar, the role of the Federal Reserve, money printing, and the trade deficit. I am sure that most people do not understand how all this works.

  6. C. Clavin says:

    “…I have not heard any arguments why the government should not have to abide by the same rules as the average, working class people…”

    The you aren’t paying attention.
    Most importantly…the Government is nothing like average working class people.

  7. David in KC says:

    @Tyrell: You really don’t know how public finance works at the nation level, do you?

  8. Rob Prather says:

    @Tyrell:

    I have a debt limit – the bank and credit card companies set it. I have not heard any arguments why the government should not have to abide by the same rules as the average, working class people.

    This is one of the most pernicious analogies out there. A family budget is in no way analogous to the federal government. Families can’t print money. Families can’t borrow unsecured for 30 years at 3%. Families can’t tax other families to raise revenue.

    Profoundly foolish analogy.

  9. anjin-san says:

    @ Tyrell

    I am sure that most people Fox viewers do not understand how all this works.

    FTFY

  10. al-Ameda says:

    @Tyrell:

    What is the interest rate that the government has to pay on this
    debt ? What if they miss a payment or are late, does the rate go up like everyone else ? Are there late fees and penalties?

    An item of more importance is the value of the American securities that people hold.

    There are large institutional investors, as well as regular citizens and foreign governments, who have significant holdings of American debt – so when the GOP purposely leveraged the Debt Ceiling negotiation into a downgrade of American debt securities they caused a loss of value in the portfolio investments of many investors. Pension funds hold American debt, retired Americans hold this debt, and foreign countries (e.g. China) have significant holdings of Federal debt securities.

    Plainly, and most intelligent people, whether conservative or liberal, agree that it is political malpractice and very irresponsible to purposely cause a loss in the value of American Federal Securities.

  11. anjin-san says:

    Plainly, and most intelligent people, whether conservative or liberal, agree that it is political malpractice and very irresponsible to purposely cause a loss in the value of American Federal Securities.

    No, no – it was totally worth it so that bottom feeders like Jenos could call Obama “President Downgrade” for a few weeks…

  12. al-Ameda says:

    @anjin-san:

    No, no – it was totally worth it so that bottom feeders like Jenos could call Obama “President Downgrade” for a few weeks…

    Thanks for reminding me.

    It is truly pathetic that some people view this stuff as a game. Millions of Americans hold government securities in their investment portfolios, a direct political action intended to diminish the value of those investments is disgraceful – and you don’t have to be a liberal or a conservative to know this.

  13. NickTamere says:

    @Tyrell: call up your credit card company and tell them that you’re going to stop making payments because you can’t properly work out your family’s budget. Post their response.

  14. Ben Wolf says:

    @Tyrell:

    What is the interest rate that the government has to pay on this debt?

    The interest rate is whatever the Federal Reserve commits to:

    If Congress appropriates more money than Congress levies taxes to pay, then, there is naturally a deficit, and the Treasury is obligated to borrow. The fact that they cannot go directly to the Federal Reserve bank to borrow does not mean that they cannot go indirectly to the Federal Reserve bank, for the very reason that there is no limit to the amount that the Federal Reserve System can buy in the market. That is the way [World War II] was financed. Therefore, if the Treasury has to finance a heavy deficit, the Reserve System creates the condition in the money market to enable the borrowing to be done, so that, in effect, the Reserve System indirectly finances the Treasury through the money market, and that is how the interest rates were stabilized as they were during the war, and as they will have to continue to be in the future.

    So it is an illusion to think that . . . the market controls the interest rate.

    – Mariner Eccles, Chairman of the Federal Reserve in testimony before the Committee on Banking and Currency, March 1947

    http://fraser.stlouisfed.org/docs/historical/house/1947hr_directpurchgov.pdf

    What if they miss a payment or are late, does the rate go up like everyone else ? Are there late fees and penalties?

    The federal government cannot and has never missed a “payment” as you put it, although the word does not apply in our monetary system. Rates on U.S. securities are fixed upon auction. Whatever the yield was when Treasury sold it off, it stays that yield until maturity. There is no compound interest and no fees. Why? Because:

    1) Treasury announces a bond sale

    2) The bonds are always purchased by the primary dealers, banks required by law to acquire them and create a market.

    3) The primary dealers borrow from the Federal Reserve the reserves they need to make the purchase. These reserves are then deposited in the Treasury’s reserve account at the Fed.

    4) The primary dealers then auction the bonds on the secondary market, where banks use reserves which originate from the Fed and Treasury to buy the bonds. Those reserves are then paid back to the Federal Reserve to settle the original loan.

    The Treasury is and has been indirectly funded by the Federal Reserve for eighty years, which means the national debt is money the government borrows from the government. There is no possibility of insolvency or inability to service our liabilities.

  15. superdestroyer says:

    @Ron Beasley:

    How is giving the Democrats everything they want good for the Republicans. The Republicans should pass a real budget along with the debit limit increase that matches their budget and then let the Democrats in the Senate decide what to do.

  16. Tyrell says:

    @Ben Wolf: Thanks. I have a few more bright questions.
    Our state has a balance budget law: it can’t spend more then in takes in. Would that help or hurt the economy if the Federal government did that?
    How does the deficit affect the value and strength of the dollar?
    How do they figure out how much money to print and put into circulation? (I am still wondering about the gold standard. Why did we go off of that? Was that one of Nixon’s big ideas?)
    I have to plead some economic ignorance. Our economics class got to the effects of the War of 1812 (one of the strangest wars in history) and then school was out .
    I remember vividly the high interest rates (14%), high inflation, and high unemployment of the 1970’s. Wage and price controls did not work. Things were worse back then.

  17. Rafer Janders says:

    @Tyrell:

    I also have a budget based on what I make. If I get a raise (has not happened in about 6 years) then I can adjust my budget.

    I’m curious — do you also have the ability to print your own money that is legal tender for all debts, public and private, and that also functions as the reserve currency for the entire world? Because if you don’t, then I don’t think that your personal household budget has much relevance to that of the US government.

  18. Ben Wolf says:

    @Tyrell:

    Our state has a balance budget law: it can’t spend more then in takes in. Would that help or hurt the economy if the Federal government did that?

    This would be a recipe for impaired economic performance. We live in a heavily monetized capitalist economy in which there is a strong incentive to save in the national currency. Imagine you live in an economy with one other person and the federal government. There are $100 in circulation; you spend $100 buying goods and services from the other person, she spends $100 buying goods and services from you and government runs a balanced budget taxing 10% from the two of you and spending it back.

    Everything is fine until one day your counterpart decides she wants to save some of her income for a rainy day. She spends $90 on your products and saves the other $10, reducing your income by exactly that amount. But the effect doesn’t stop there. While she has saved $10 and reduced your income, she has also reduced her own income, because you now only have $90 to spend on her products. Note also the government has now fallen into deficit because its revenues from you have fallen to $9 while it is still spending $10. So in each budgetary cycle the government’s spending is adding $1 to the money circulating between the two of you.

    When your friend realizes her income has fallen she becomes very concerned and decides to save an additional $10; now she has reduced both your and her incomes to $80 and pushed the government further into deficit. The end result is the two of you are unable to buy as many goods and services as you once did and have become materially poorer. Your incomes, your productive output and the quantity of paid work available to you have all declined. The appropriate action for the government would be to augment its deficit to restore incomes so that your friend (and you if you wish) can save without negatively impacting each other. Only the government can do this because it is the currency monopolist. It has complete control over the dollar and we know what happens if monopolists restrict supply. I do believe there are far better ways for government to spend those additional dollars back into the economy, ways that don’t get in our way or reduce control over our own lives and I think this is a debate we really need to be having.

    How does the deficit affect the value and strength of the dollar?

    The problem here is what happens if the world decides it has enough dollars and the real effective exchange rate of our currency falls, raising the costs of our imports. My own view is that this is inevitable because no currency can remain the international reserve forever. But I also don’t see this happening in the near or medium term. Quite simply there is no other country willing to run large trade deficits (which is the primary way one country can acquire the currency of another) and with an economy both large and diverse enough to absorb the liabilities (each dollar is a claim against U.S. productivity and no one is as productive as we are).

    How do they figure out how much money to print and put into circulation? (I am still wondering about the gold standard. Why did we go off of that? Was that one of Nixon’s big ideas?)

    Most money in circulation is determined by consumer demand for loans. So the money supply will expand when credit demand is high and contracts as the loans are paid back. The Fed attempts to control the quantity of dollars extended through loans by changing the interbank interest rate, but I don’t believe this is a particularly effective method given five years of zero interest rates and declining demand for credit. If we had sensible fiscal policies the appropriate quantity of dollars to put into circulation would precisely satisfy the non-government sector’s desire to save. Obviously we could never get the exact dollar amount but we can implement stronger automatic stabilizers which expand and contract spending according to the private sector’s spending and saving desires without going through the political process.

    We left the gold standard in the 1930’s during the Great Depression and the run-up to World War II. The government recognized it could not possibly fund the war while its currency was fixed and so transitioned to a fiat currency, enabling it to spend whatever was required (the war bonds which were sold during this period did not actually provide funds for the war effort, they were sold so that people would have less income to spend, reducing inflation as the government poured dollars into the economy). After the war the international community adopted the dollar as the world reserve currency and the U.S. fixed the price of the dollar at $35 per ounce for purposes of trade. By the 1970’s the U.S. was no longer able to sustain $35 per ounce of gold fixed rate because there was too much international demand for our currency. We then transitioned to a fully fiat, free-floating currency and have been there ever since.

  19. JohnMcC says:

    @Ben Wolf: Excellent!

  20. C. Clavin says:

    @ Superduperpooperscooper…
    The Republicans passed a budget…Paul Ryan’s abstract budget that everyone but Republicans have been saying for years was based on smoke and mirrors. Then when it came time to appropriate the specifics of that budget, in the bill to fund the Departments of Transportation and Housing and Urban Development, they couldn’t because the reality of that abstract budget didn’t have any political support.
    Republicans are delusional. Their ideological theories are completely untethered from reality.
    Talk is cheap..and when the rubber hit the road…Republicans chickened out.

  21. C. Clavin says:

    @ Tyrell…

    “…Our state has a balance budget law: it can’t spend more then in takes in. Would that help or hurt the economy if the Federal government did that?…”

    Except that your state cannot balance it’s budget without a ton of money from Washington DC…especially if your state is a Red State…which are the biggest welfare queens of all the states. Republican hypocrisy is awe inspiring.

  22. Rick Almeida says:

    @superdestroyer:

    I have to say that I think SD is completely right on this. The fact that our government has been financed by continuining resolutions for so long is a disaster, and I don’t care “who started it”. Unfortunately, there are no grownups anywhere to be seen, so…