Friday, December 28, 2012

How The Treasury Copes With The Debt Ceiling

Now that the United States debt ceiling is once again making the news, I thought that I'd take another look at this looming issue, one that is of particular concern when viewed in conjunction with the fiscal cliff/slope, particularly the mechanisms that are available to the United States Treasury as it attempts to keep the country and its currency afloat.

Here is a graph showing the history of the United States debt limit since 1940:

For your edification, here is an curve showing exponential growth in the size of a population (or for that matter, the size of the debt ceiling in dollars):

You'll notice on this curve that the growth in population increases as time passes until, eventually, the population (or debt in this case) grows by ever increasing amounts over ever decreasing periods of time, eventually growing by an infinitely large amount in an infinitely small amount of time.  Now, looking back at the graph showing the debt ceiling growth, are we not starting to see the same thing, albeit in steps?

If America's highly partisan Congress does not act to increase the debt limit by the end of December, the U.S. Treasury will have approximately $197 billion in Extraordinary Measures that it can use to continue to meet Washington's financial obligations.  This "spare tire" and the Treasury's cash on hand along with the government's daily revenue will "run flat" sometime in February 2013 if the current $16.394 trillion debt ceiling is not raised.

From a publication by the Bipartisan Policy Center, here is a graphic showing the very basic steps that the Treasury can use once the debt ceiling is reached:

Keep in mind that the government owes itself substantial interest on intra-governmental debt including the Social Security and Medicare Trust Funds on December 31, 2012, a payment that will hasten the advent of the debt ceiling breach.

As I noted above, the Treasury has the option of using Extraordinary Measures, a series of legal financial maneuvers, to meet the gap between the breaching of the debt ceiling and the date that Congress sees fit to stop acting like children and raise the debt ceiling yet again.  Once the debt ceiling is reached, the Secretary of the Treasury will declare a Debt Issuance Suspension Period (or DISP) meaning that the Treasury Department can no longer issue Treasuries to meet government spending obligations.  Certain Extraordinary Measures can only be used once a DISP has been declared by the Treasury.  These Extraordinary Measures include:

1.) Not reinvesting the Exchange Stabilization Fund (saves $23 billion).

2.) Not reinvesting maturing securities in the Civil Service and Postal Funds (does not apply in 2012).

3.) Not reinvesting interest payments and cash receipts to the Civil Service and Postal Funds (saves $21 billion).

4.) Not reinvesting the Federal Employees' Retirement System G-Fund (saves $154 billion).

Using these options will allow the Treasury to continue to issue additional debt securities (i.e. Treasuries) to the public and thereby raise cash to continue to pay federal government obligations....but only to a total of $197 billion.  And, in the end, the Funds must be fully reimbursed once the debt ceiling is raised as it certainly will be.

How long will these Extraordinary Measures last?  In 2011, they lasted from May 16th to August 1st, a total of just under 80 days.  This time, Washington won't be so lucky, largely because February tends to be a very expensive month for the federal government.  In February 2012, taxpayers who filed their returns early received $112 billion in refunds.  On top of that, expenses in that month for Medicare and Medicaid, Social Security, interest on the debt and Defense vendor payments totalled another $177 billion.  Here is a chart showing the revenues and outflows for the month of February 2012 showing that there was a monthly cash deficit of $261 billion for that month alone, well more than the $197 billion in Extraordinary Measures:

With all of this data in mind, the Bipartisan Policy Center estimates that the Treasury will be completely out of fiscal ammunition sometime in February 2013.

How much will Congress have to raise the debt ceiling to get the United States through to the end of 2013 and 2014?  Here is a bar graph showing the Bipartisan Policy Center's estimates:

To get through just one additional year from now, the debt ceiling will have to be raised by between $730 billion and $1250 billion, pushing the debt ceiling up to between $17.124 trillion and $17.644 trillion.  To get through to the end of 2014, the debt ceiling will have to be raised by between $1300 billion and $2200 billion, pushing the debt ceiling up to between $17.694 trillion and $18.594 trillion.  This will mean that, in a two year period, the debt ceiling will have increased by up to 13.4 percent, well above even the most optimistic GDP growth levels.  This will push the debt-to-GDP ratio well above 103 percent where it lies today.

If, in the unlikely event that the Treasury is unable to issue new debt over a period of time that exceeds the timeframe that Extraordinary Measures are in effect, the government would be forced to default on some of its financial commitments, delay or limit payments to creditors and could cut payments to the military, cut benefits to Social Security recipients and cut payments to millions of unemployed Americans. Talk about a fiscal cliff!

What makes absolutely no sense in this "reality" is the fact that Congress is permitted to vote for huge cuts in the level of taxation and increases in spending yet, it has the power to tell the Treasury that it is not permitted to sell additional bonds to cover the Congressionally created deficits.  Is it any wonder that fewer than 20 percent of executives surveyed by McKinsey Global Institute in 2010 expected the United States dollar to be the world's dominant global reserve currency by 2025?  The system is broken and, unfortunately, today's poisonous partisan atmosphere is doing little to fix the problem.

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